Sunday, June 28, 2009

Obama Administration's Unemployment and Job Creation Conundrum

“We have tried spending money… We are spending more than we have ever spent before and it does not work… After eight years of this Administration we have just as much unemployment as when we started.” - Henry Morgenthau, Jr., FDR’s Treasury Secretary, 1939

(1) simultaneously deploying Quantitative Easing and Keynesian Government Deficit Spending, in a current environment of high government debt (remember these two theories were developed in low or zero government debt), creates uncharted economic waters with plenty of unintended consequences,

(2) the “Stimulus” package of $800 billion is unlike prior Keynesian Infrastructure Spending Plans. The $800 billion is more akin to Social Engineering than Infrastructure Spending . That is, prior historical Keynesian Spending Plans were Infrastructure Spending Plans creating short term jobs from Infrastructure spending,

(3) no incentives exist in the current government policy for Private Capital Formation leading to Private Sector job creation,

(4) The current stimulus plan is based on wealth transfer and the recipients of the wealth being low income earners who have a 100% propensity to spend hence creating “stimulus“,

*** an odd out item is the Theory of Low Wage Earners having a 100% Propensity to Spend. Its an economic phenomena. However, to use this particular economic phenomena as the basis for a stimulus plan is strange to say the least. If one studies the theory you find that low wage earners experiencing additional income merely buy additional Staples of Life. Completely understandable that their marginal propensity to spend is within Staples. However, what is the multiplier effect of additional Staples purchased?

(5) disposable income of businesses and consumers is being threatened by the expiration of the Bush Tax Cuts, proposed increases in State and Local Government Taxes and Fees, proposed Cap and Trade energy tax, proposed National Health Care "down payment", proposed Capital Gains tax increase, etc., etc..

All of these ingredients bring you back to 1939 and Henry Morgenthau, Jr. and his comment above. If Henry was alive today he would be interested in the lessons learned from the Great Depression.

The Obama Administration likes to cherry pick certain lessons from the Great Depression and skip over all the remaining lessons. You never hear that taxes were increased on businesses and consumers during the Great Depression which depressed Private Capital Formation. Private Capital Formation which leads to Private Sector Jobs was squelched. How about the lesson that Keynesian Government Deficit Spending is by definition short term in nature, creating short term jobs, that must be replaced by Private Sector Jobs.

With rising taxes reducing disposable income and absolutely no incentive for Private Capital Formation, any short term anemic economic recovery will be a jobless recovery. High unemployment will likely persist.

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