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Sep 05 2011

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Labor Day – 2011

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Time to Turn Things Around

On this holiday, set aside to honor our workers, American labor is in crisis.

According to the Bureau of Labor Statistics, nearly 30 million Americans are unemployed, underemployed or have given up looking for work altogether.

There are between four and five unemployed for every job opening.

Moreover, this has not been a temporary phenomenon. Unemployment in the US has exceeded 8% since February 2009; the longest period of sustained unemployment at the level since the beginning of WWII.

And the road back to full employment seems equally daunting.

According to Heidi Shierholz from the liberal Economic Policy Institute, to reduce unemployment to 5% in five years would require the creation of 16.9 million new jobs, or an average 282,000 jobs per month, over 60 months.

By way of contrast, since January 2009, the economy has had positive job numbers in only fourteen months of those months, with an average of only 158,000 jobs created; not nearly enough.

What to do?

Keynesian stimulus embraced by the Obama administration has utterly failed.

“Cash for Clunkers” and a first time home buyers tax credit, provided a temporary but fleeting boost, with overall marketing distorting results.

In addition, the collapse of the solar panel company Solyndra, which was hailed as the cornerstone of America’s green jobs future, but went bankrupt this week after receiving half a billion in federal funding, is microcosm of the Stimulus law and a cautionary tale of government-directed jobs creation.

Cheap money, created by the flood of dollars released by the Federal Reserve is ironically off-set by stricter lending rules by financial institutions. Rates are low, but in a Catch-22, the loans are beyond the reach of the people most in need.

Fiscal stimulus, the cut in payroll tax paid by workers and the extension of the Bush tax cuts have failed to be catalytic in any manner due to the uncertainty of their duration. No sooner had the Presdent signed an extension of the Bush tax cuts for one year, then he began promising to allow their expiration in 2013.

And all of this occurs against a troubling backdrop where American economic growth has stalled and the European Union struggles with a sovereign debt crisis compounded by economic retrenchment. In Asia, China faces a potential housing bubble bigger than the US housing crisis in 2008, while in India, manufacturing has slowed to a crawl.

In terms of timing, the return of Congress from its summer recess and the scheduled national address by President Obama on jobs could not be better timed. We are at a truly pivotal point in our economic affairs, with the potential for catastrophic outcomes unless something is done.

Thus far, partisans on both sides have offered policy prescriptions that are timid, ad hoc and off-target.

Republican announced an agenda for the coming weeks that focuses on repealing regulations, taking on the National Labor Relations Board, and reducing taxes for small businesses. Its a “nibble-at-the-edges” agenda.

The Democrats are planning for little more. Early leaks on the Administration’s jobs plan focuses largely on repackaging of previous initiatives, infrastructure and clean tech spending, and continuation of the payroll tax cut.

Neither agenda, even if both were implemented in full, is going to shock the economy significantly enough to change the status quo.

To shape a package that restores America to growth, Washington needs to start with the intangibles.

America is in the midst of a crisis of confidence. The post-2008 economic hardship is increasingly seen as the “new normal.”  Leading experts talk about the likely need for years of hardship before the economy can begin to grow.

Amid the silent suffering of American families, the political class in Washington appears divorced from reality, engaging in ferocious partisan warfare where Democrats brood in denial over entitlements and the holy grail of taxes on the wealthy, while newly empowered conservatives brashly risk sinking the American economy in order to save it.

A news flash for the elites.

For Democrats, entitlements on their current track will go bankrupt. Tax increases on the wealthy would barely dent the deficit. You cannot regulate the risk of living out of living life.

For conservatives, it is time to understand that you can eliminate discretionary spending entirely – the FBI, food safety, border patrol – and the deficit will still be gargantuan. And what is so fantastic about the current, creaking 70,000 page tax code that makes it beyond adjustment, where one piece goes up while another goes down?

Any plan that has the promise of restoring growth must first be large enough to have short-term impact on a long term trajectory.  And each element of the plan must be focused on changing the narrative that are problems are bigger than us.

Confidence is determined by a sense personal well being. That tomorrow can be better than today. We must focus here.

The Great Recession began with the dual collapse of the financial markets and housing markets which were intertwined, something that has never happened in any previous downturn. Through the collapse of housing prices and the evaporation of wealth in 401ks, IRAs and other retirement vehicles, the Great Recession stole between $8-10 trillion from Americans.

We need to restore it.

The first step is the bold and fairly radical plan I put forward earlier in the week, to “reset” mortgages to current property values, and reissue new loans at current low rates. It will put billions in the hands of Americans who have been trapped in homes that under current conditions, will never appreciate to their loan value in their lifetimes.

The second step is a comprehensive solution that links the tax code to spending and entitlements. The goal here is not to cut spending, or restrain spending for spending’s sake, but to use these tools as incentives to provide long term solvency for entitlements and create a catalyst of predictability that will coax corporations sitting on trillions to invest in the economy.

To preserve entitlements, Republicans would agree to uncap the FICA payroll tax to apply to all income. With that additional revenue, the actual tax could be reduced from 6.2% to something more manageable – 4%.

This should be easy for the GOP to accept; the FICA tax is regressive and hurts the lower middle class the most. Indeed, broading the base and lower the rates is Republican gospel now. But most importantly, this change will solidify Social Security for the next generation.

For an uncapped FICA, Democrats would agree means-test benefits for the wealthy, as well as a timed increase in the retirement age tied to mortality and a new, more realistic calculation for inflation as a trigger for higher Social Security benefits.

This would not only “save” Social Security, it would improve it and serve as a strong signal to international markets that America is serious about dealing with its deficit.

On taxes, trade loopholes for rate reductions.

For goodness sake, stop fighting over the Bush tax cuts. That is so 20th century.

Start from a clean sheet of paper.

Remove the distortions and breaks from the tax code, including mortgage interest deductions, tax health care benefits as ordinary income and get rid of the subsidies for ethanol, and other, protected industries. Allocate the removal of the loopholes on a 3-1 basis; $3 for tax reduction, $1 for deficit reduction.

Set up new, lower tax rates, 25, 20 and 15 percent.  Reduce the corporate tax to 20% so that corporations can be competitive internationally, and where American companies will invest here. Reduce the capital gains tax so that people will invest.

Third, put a moratorium on regulatory action and freeze spending on domestic discretionary programs for two years – a time-out to allow the US to get its bearings.

Government creates government jobs.  It cannot create private sector jobs. So the goal in this exercise should not be to provide jobs for the unemployed, but to create – as close as possible – the ideal conditions where the private market invest and expand, creating jobs.

Go back for a second to the required job creation, referenced above, necessary to bring unemployment down to 5% in five years – 282,000 jobs a month over 60 months.

When the right incentives for the private market were put in place in 1981 – radically lower marginal tax rates, less regulation, a deal to extend to solvency of Social Security, the US economy was a jobs engine. Between 1983 and 1987, the US economy created an average of 247,000 jobs per month, and that was with a smaller overall worker pool.

It can be done again, if serious people are willing to make bold choices.

But if Washington paralysis continues, those 30 million unemployed, and like-minded, frustrated citizens, make a credible base for a 3rd party.

DC, consider yourself warned.

Happy Labor Day.

 

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