Out of Control Policy Blog

Unemployment PointóCounterpoint

The weekend edition of the Morning Call (Pennsylvania) featured thoughts on the unemployment from myself and Center for American Progress economist Heather Boushey. The whole piece is here. Since we didn't have a chance to respond directly to each other in this point counter point, I wanted to add a few thoughts. First, Boushey says:

"What we're seeing is that the reason businesses are not hiring is they are afraid they don't have enough customers. If you cut off benefits at a time when we've never seen so many long-term unemployed before, those people don't have cash in their pockets. This is profound for businesses across America who do not see people coming through their doors to buy goods. This has a reverberating effect."

If businesses believe there will be a loss of demand in the future, it would follow that they wouldn't necessarily want to hire. And slumping retail sales could help build this case. But there are holes in this story you could drive a stimulus funded dump truck through.

The assumption is that people with more unemployment money will spend it at businesses afraid of slumping demand. But if you are unemployed and you are depending on those checks, you're using that to pay a mortgage or rent, for utility bills, for staple goods. That stimulus money doesn't necessarily translate into more demand creating jobs at tech firms, auto manufacturers, or green jobs. If the stimulus money is being used by the unemployed to buy new cars or upgrade their home, the argument for the need to extend redistributive payments to the helpless falls apart.

Essentially, this is just stimulus spending by another name. But stimulus spending doesn't create sustained growth in an economy. The federal government is simply borrowing money from the private sector and trying to put it in the economy where central planners think it could best create an impact. Beyond the knowledge problem (it is well established that government doesn't pick good winners and losers), the government is just creating an incentive for banks to park their money with the Fed. The stimulus crowds out private investment. And since banks can just loan to the government and make a profit safely until there is more stability in the economy, they don't have to lend to the private sector. And that has been a reason we haven't seen innovation in the economy. That is a reason businesses are not hiring. That is a reason businesses are not starting.

At the end of the day, businesses are not hiring because of the intensive attack on business from the Obama administration. Verizon CEO Ivan G. Seidenberg says he is concerned about tax increases, policy changes and regulatory actions that together threaten to dampen economic growth and "harm our ability . . . to grow private-sector jobs in the U.S." And in a June speech, Seidenberg said, "In our judgment, we have reached a point where the negative effects of these policies are simply too significant to ignore. By reaching into virtually every sector of economic life, government is injecting uncertainty into the marketplace and making it harder to raise capital and create new businesses."

Last month, the Business Roundtable released a 54-page list of administration polices that are limiting the growth of business in America. The more difficult the government makes it for business the thrive, the longer it will take for the unemployment problem to turn around. Ms. Boushey says the government should jump start the economy and should "get things started until the private sector takes hold and can run on its own." But as the Business Roundtable report says, "Economic recovery must be lead by the private sector, both large and small, if we are going to create jobs and reduce the unemployment rate." (emphasis added)

Again, see the whole PCP here.

Anthony Randazzo is Director of Economic Research


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