Job shortages: It's the investment – not the economy – stupid

Letter in the WSJ today:

Our Shortage of Jobs Isn't From a Lack of Spending

In "Voters to Democrats: Jobs, Jobs, Jobs" (op-ed, Feb. 19), former President Bill Clinton's pollster Doug Schoen writes: "Let's be clear. The Democratic brand is in trouble--big trouble. . . . The Democrats need to do a number of things. First and foremost, they need to recognize there is only one fundamental issue in America: jobs." Unfortunately for the public and the economy the leadership continues to cling to the ideas and polices behind the unsuccessful 2008 and 2009 stimulus bills based on a very crude Keynesianism with an emphasis on government spending and stimulus to consumer spending.

But the current problem is driven not by lack of spending by government or consumers, but by a lack of private investment and its associated job creation. Private investment is forward looking. Now, as in the 1930s, investment is being significantly restricted by "regime uncertainty" and the potential of regime worsening. Current rhetoric and proposed policy are attempting to undo the liberalizations that ended the stagflation of the 1970s and as Andrei Shleifer of Harvard University put it, began an era that "Between 1980 and 2005, as the world embraced free market policies, living standards rose sharply, while life expectancy, educational attainment, and democracy improved and absolute poverty declined."

It didn't help that as the current great recession began and deepened, it was apparent that Congress would allow the 2003 tax code change to expire in 2010. If Congress and the administration are serious about creating an environment that will effectively, and even quickly, turn the economy around, then immediately make the 2003 tax changes, including elimination of the estate tax, permanent. Such a policy, combined with a serious effort to reverse the current federal spending binge, would reduce regime uncertainty, lessen the fear of regime worsening, and create an environment conducive to private-sector investment bringing on recovery and growth, while having no or little significant impact on future deficits.

John P. Cochran
Denver

The Shleifer quote is from "The Age of Milton Friedman." Journal of Economic Literature: 2009, 47:1, 123-135. Following the quote he then asks, "is this a coincidence?" After reviewing competing claims he concludes (p. 135), "On strategy, economics got the right answer: free market policies, supported but not encumbered by the government, deliver growth and prosperity." The period could have, perhaps more aptly, been referred to as the age of Friedrich A. Hayek. The article is highly recommended to anyone interested in the interaction between market liberalizations and economic growth and development. I thank Steve Hanke for this reference.

"Regime Uncertainty" is from Robert Higgs. "Regime Worsening" is from Ben Powell.

On a similar topic, below is a previously sent unpublished letter to the Journal.

It's the Spending

In the Feb. 18 Journal (Wonderland: It's the Spending America) Daniel Henninger correctly identifies the major political impediment to sustained economic growth and recovery - government spending. While total federal spending has grown, in real terms, over 221% since 1970, nearly seven (7) times the rate of growth of median household income during the same period, it is the recent expansion of federal government spending relative to the total economy and the expectation of the continuation of that trend into the foreseeable future that is the real problem. Two (2) studies, from 1998, one by economists Gallaway and Vedder for the Joint Economic Committee, another in the Cato Journal by Gwartney, Holcombe, and Lawson clearly document that growth of government beyond provision of 'core functions'; has significant costs to an economy in terms of reduced economic growth.

What conclusions can we draw from these studies about growth prospects for the future of the US economy? The studies suggest peak growth rates in GDP if federal spending is kept to 15%-18% of GDP. Based on this result, by my calculation, every 1% increase in the federal spending-to-GDP ratio results in a 0.375% decrease in the growth rate of GDP. In 2007, just prior to the current slowdown, the federal government was consuming 'just' 20% of GDP. Per the Journal (The Obama Revolution, 02/27/2009) in this unforgettable year in the history of American spending, the ratio shot up 27.7% and is realistically now expected, without significant reform, to stay in the mid 20s range for most of the next decade. Continuation of this trend then could shave between 1.5 and 2 % from the average growth rate over the decade which, combined with a growing population, would result in significant losses in household welfare and real GDP per capita. As Henninger suggests, we "need one big club to beat this blob into a size appropriate for what we still call the United States. Those concerned about the economic future of the country should keep their eye on the ball. A focus on deficit reduction is misplaced and misdirects the public from the real threat to prosperity and freedom - out of control expansion in the size and nature of government. Let's hope voters and their candidates use the club wisely.

Add/view comments on this post.

The Christian Science Monitor has assembled a diverse group of the best economy-related bloggers out there. Our guest bloggers are not employed or directed by the Monitor and the views expressed are the bloggers' own, as is responsibility for the content of their blogs. To contact us about a blogger, click here. To add or view a comment on a guest blog, please go to the blogger's own site by clicking on the link above.