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What about Jobs?

The Obama administration is proposing an $800 billion fiscal stimulus package, promising to create jobs. This proposal would add to the already enormous national debt, and require American taxpayers to pay more interest for the foreseeable future. Are there sufficient benefits to justify this cost?

The recent increase in unemployment to 7.2% is further evidence that the U.S. economy has created too few jobs over the past year. Generally, total employment grows with the population and the willingness of people to work. For example, total employment was a bit less than 138 million at the beginning of the first Bush administration. It dropped during the recession the following year, recovered and reached a new peak of close to 147 million in November of 2007. It has substantially dropped over the last year. The December 2008 figure is 142 million, a drop of 2% from the peak.

At the same time, the labor force, made up of the employed and the unemployed, rose from 153.8 million to 154.4 million, about ½ of one percent. That may underestimate the number of people willing to work. The labor force generally grows, but dropped by nearly 400,000 during November and December last year. That suggests that some willing to work have become so discouraged that they stopped looking and are no longer counted as unemployed. The eligible population continued to increase over the last year, growing from 233 million to 235 million, about eight-tenths of one percent.

There continues to be a growing number of people who want to help produce more goods and services, but the number of people actually working has dropped. Something is seriously wrong. But when thinking about unemployment, it is important to keep in mind fundamental economic realities like scarcity. There are not enough productive resources, including labor, to produce all the consumer goods and services that people could use to achieve their goals. The problem is not that people are bored and need to be kept busy. People need jobs because they want the consumer goods and services that their labor can help produce.

Many of the institutions of a market economy ensures that resources, including labor, are used to produce the largest amount possible of the most valuable consumer goods and services. Many of the 11 million unemployed are even now being redeployed from where they produce less valuable goods and services to where they can produce more and better goods and services.

This is an important factor now. The substantial drop in home prices shows that the resources used to build those homes could have been better used elsewhere. Building even more homes under current conditions would compound the waste. It isn’t that the homes are worthless, rather the resources, and especially the labor, would be better employed elsewhere.

But where should these resources be employed? Generally, there are growing sectors of the economy where demand, profits, production, and employment are expanding. More new jobs are offered in growing sectors than are lost in shrinking sectors, so that total employment grows to match the rising labor force.

Yet for the last year, investment expenditure has been shrinking. And signs are pointing to a rapid drop off in consumption as well. Generally, the market prices that maintain a proper balance between investment and saving, and so, between total expenditure and the productive capacity of the economy, are interest rates. If spending is too low relative to productive capacity, lower interest rates should result in greater investment and consumption spending, returning the economy to equilibrium.

Today, the Federal Reserve creates and destroys money to manipulate interest rates, superceding market forces. As the economy has fallen into recession over the last year, the Federal Reserve has lowered its target for the Federal Funds rate from 4.75% in October of 2007 to ¼ of one percent today. Actual transactions in that market are closer to 1/10 of one percent in recent weeks. The interest rate on government bonds coming due in one month are at 1/100th of a percent and those coming due in three months at 1/50th of a percent. While the prime interest rate is 3.25% and BAA corporate bonds are at 8%, the interest rates that have been the traditional focus of the Federal Reserve are very close to zero. They cannot go much lower.

Fortunately, the leadership of the Fed has recognized that its traditional interest rate targets are no longer useful, and has begun a process of “quantitative easing.” This policy is aimed at increasing the quantity of money through the purchase of assets other than short term government bonds. The fundamental problem of inadequate spending in the economy is an imbalance between the supply and demand for money. Most of us manifest an increase in our demand for money by earning income and not spending part of it on anything. If the Fed fails to create the amount of money people want to hold, people will try to increase their money holdings by spending less. The policy of quantitative easing seeks to increase the money supply, correcting that imbalance. This should result in increased spending on goods and services, and allow for recovery of production and employment. As improved economic conditions result in investors shifting away from holding money to other financial instruments, the Fed can and should sell off some of its assets to those now willing to hold them, while reducing what will then be excessive money balances.

The Fed has no experience in this sort of quantitative easing, so an even more hit or miss result can be expected relative to the Fed’s already spotty past performance. However, the sorts of fiscal stimulus programs proposed by the Obama administration have a very poor record. Most of the impact will be too late, after the economy has already recovered. And it will certainly create a larger national debt and a greater burden for future taxpayers. I believe that it is a mistake.

Copyright © 2009 by W. William Woolsey and The Free Enterprise Foundation. All rights reserved

About the author: Professor William Woolsey as a member of The Free Enterprise Foundation's editorial staff and senior writer on national economy reporting. Dr. Woolsey is a distinguished Professor of Economics in the Citadel’s School of Business Administration and a former Libertarian candidate for Congress.

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