Sunday, November 27, 2011

The Fire Bell of Unemployment

THE failure of the Congressional supercommittee to come up with any agreement on the budget deficit makes it even less likely that Congress will rise above its partisan divisions and act on behalf of the millions of out-of-work Americans.

Yet without government intervention, we may well have high unemployment and social discord for years to come. How did this disaster happen?

Probably the most important reasons for the failure to rescue the unemployed are intellectual, rather than purely political. First, there is a lack of scientific proof that government spending — fiscal stimulus — will do much to remedy unemployment. Second, there is a lack of appreciation of the human impact and social consequences of high, long-term joblessness.

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  1. Dr. Shiller's ideas seem to be stuck in a 1980's time warp.The U.S. has move much of its manufacturing off-shore and we are are now more of a service based economy. That means that jobs will mostly be created by increased consumer spending. With high consumer debt and a weak jobs market, an up-tick in consumer spending for services is possible only if income increases for those making less than $100,000 per year. With unemployment and underemployment being above 14%,the only way that can happen is a reduction in taxes that those earning less than $100,000 pay. Tax reform is the logical route to this outcome. For Shiller to state "The contractionary effects of tax increases could have been offset by some expenditure increases that would stimulate the economy and help provide jobs" is pure hyperbole that could only happen in a Keynesian daydream. In the real world of our U.S. service and consumption economy his suggestion is not possible. I challenge Dr. Shiller to identify any stimulus spending plan that would result in permanent private sector jobs of any substance that would lower unemployment to 7% ( where the U.S. must return if there is any hope to close the deficit gap) and which doesn't use make believe assumptions about multiplier effects. Folks in Washington and those in ivory towers in academia need to understand that old ideas of economic outcomes based on manufacturing as the driver no longer apply to the U.S.

  2. Shiller is right. The popular feeling that lowering tax rates makes businesses spend more is a bit odd. Imagine that you are paying 10% less tax. It has not changed your operation margin. So instead of earning $40,000 after tax you might now be earning $44,000. Does that mean you'll go out and hire more staff? I doubt it. If that $4,000 is automatically allocated to someone employed on a very low salary then wow.. he's going to be not only motivated to keep working but he's going to be able to spend - and will actually spend unlike the business who just saves $44K instead of $40 that year. Distribute money to the part of the economy where the problem is - now that is watering the right part of the garden.