The United States has set itself on a path of unsustainable debt levels with little political prospect to implement the policy mix that will turn this tide. What America needs is a government committed to generating real and sustainable economic growth and a real lowering of the fiscal deficits through strong commitments to (1) permanently lower tax rates on households and businesses and (2) stricter responsibility and control on government spending.
Recent research by two Harvard economists highlights the link between regaining a balanced budget by the federal government, lower tax rates, and the economy. This research supports the model of economic growth where a reduction in the tax rates faced by households and businesses stimulates an economy much more than a model relying on more government spending.
Printing more money to pay off our debt (by creating inflation so the fixed debt is worth less in real terms) is out of the question because of the possibility of losing control of the high inflation. Hence, our only remaining option is to pay off the debt the old fashioned way, by creating budget surpluses and paying a bit of our debt every year.
Moreover, the research recommends that a strong commitment to cost-cutting measures will also contribute substantially to lower and sustainable deficit- and debt-to-GDP levels. A critical step we could take to decrease spending is to cut costs of largely inefficient government-sponsored programs, allowing lawmakers to cut back tax rates across the board accordingly.
And yet this is easier said than done. Government-sponsored entitlement programs have no end in sight, making it hard to significantly cut spending and by extension to refrain from raising taxes to fund these entitlement programs. The stimulus bill and the current health care bill will make it even more difficult to achieve fiscal solvency. These authors conclude:
Health care reforms seem to imply large increases in spending, the retirement of the baby boomers is not too far, and in the pressing time of the crisis the issue of Social Security has been in the background, but it has not disappeared. A relatively high unemployment for a couple of more years will require spending on subsidies. The budget outlook looks rather grim on the spending side. The Congressional Budget Office predicts deficit of 7 per cent of GDP up to 2020. This is not a rosy scenario.”
Aleksey Gladyshev currently is a member of the Young Leaders Program at the Heritage Foundation. For more information on interning at Heritage, please visit: http://www.heritage.org/About/Internships-Young-Leaders/The-Heritage-Foundation-Internship-Program
The stock market reacted favorably this morning when it was announced that the number of people on payrolls fell by 36,000 in February, better than the 50,000 loss expected by economists. The unemployment rate held steady at 9.7%, also slightly better than expected.
Another indicator that may have received less attention is the 15-Week unemployment rate—the percent of the labor force that has been unemployed for 15 weeks or longer and is still looking for employment. In December, 2007 this statistic stood at only 1.6%. In February, 2010, it was 363% higher at 5.8%. This, after three “stimulus” bills during the time frame is proof that the idea that we can “spend our way out of recession” is for the birds. In fact, after rising the astronomical 363%, the rolls of those unemployed 15 weeks or more has only declined by 147,000 since it peaked in November of 2009 at 8 million 976 thousand people looking for work.
The longer-term 15-week unemployment rate is most often used to detect the level of economic pain being felt in the economy. Equally important though, this statistic reveals the percent of the workforce whose skills are eroding by not being put to use. People unemployed for 15 weeks or longer are becoming less employable as time goes by. Skills deteriorate when not put to use. Therefore the chart below is alarming.
“Stimulus Bill” spending crowds out the private sector. There are more government jobs competing with private market jobs and it is not a level playing field. The government jobs are paid by the taxpayers regardless of whether their employers run them prudently because it can operate at a loss indefinitely until the government goes bankrupt and the federal spigot must be turned off. Jane Businesswoman in the private sector though has to remain profitable and compete.
Another problem with “Stimulus Bill” spending is that many workers hired by the government are paid Davis Bacon wages, which are artificially high. Therefore fewer workers can be hired, contributing to longer-term unemployment.
The solution to fighting longer-term unemployment is to put more money in the pockets of small business owners. This can be done through tax cuts such as by:
- Permanently repealing the Death Tax which keeps business from expanding and growing.
- The government should provide assurance that small business owners aren’t going to be hit with a per-worker health insurance tax.
- The tax on dividends should be abolished so that larger companies can hire with the money they now use to pay higher dividends to shareholders.
- The corporate tax rate of 15 to 38 percent should be lowered to 15 percent across the board so jobs are no longer lost overseas to other countries that have lower corporate tax rates.
Until policies such as these see the light of day, it will be nighttime in America—the unemployed will suffer and their skills deteriorate.