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It’s About Jobs…and the Economy…and How We Got Here!

January 26th, 2010 · No Comments · Economics, jobs, Politics

Americans need jobs. Yes, you can say that the Gross National Product has increased a certain amount or fallen back a certain amount. You can say that our exports have risen as a percentage of our Gross National Product. You can say that the index of home values has risen against the year-over-year index. You can say that the market indices show that there is a rising investor confidence.

But those things mean nothing. The essential starting point, that which is the cause of everything else in the economy…is a job. People need jobs. People need jobs to make money to survive. Right now, in addition to those who are gainfully employed, at least 15 million more people need jobs. That’s something like 17% of the total number of households or potential workers. But percentages don’t make any difference either. It is 100% when it happens to you.

First, how did we get here? Second, how we can fix it? Of course, it will only be fixed, no matter what the solution, if enough people really start to scream bloody murder at their Senators and Representatives.

The way we got here is actually very simple. We don’t have much industry in this country. The last big wave of new industry was the IT business which flourished under Clinton. After about eight straight years of increased jobs and national income, by 2000 people were doing pretty well. In the late 1990s, in some parts of the country, unemployment was less than 2%.

But the IT business was beginning to cool off by 2000, and when Bush II came into office, in the typical Dubya, day-late and dollar-short way, he decided that he would take some of the surpluses that had been generated under Clinton and create tax cuts. He would give the money back to citizens because “they know how to spend it better than the government.”

It turns out that they didn’t. His tax cuts immediately set in motion a different set of economic conditions that wiped out the potential deficit reductions that Clinton had put in place. What would have been at minimum a cut in the national debt from $5 trillion down to at least only $2 trillion, instead resulted in deficits, which eventually ended in an $11 trillion national debt by 2008 and a recession that cost almost another trillion in one year.

In 2001, after Bush gave the huge $1.2 trillion tax cuts to everyone but skewed it heavily towards the rich, we had, in September, an attack on this country which threw some industries into a tailspin. That created a series of events that produced a further recession. This recession created unemployment and required stimulus. Bush and Cheney, now completely ignoring the recession and bent on war, pushed through a second round of tax cuts in 2003, again primarily directed at the rich. The result was that no new jobs were created and the country went even further into debt as we went into an elective war with Iraq which cost about a trillion dollars.

To stimulate the economy, the Federal Reserve held interest rates low. This put more money into the economy. And how would that money be invested? We no longer have manufacturing of any significance. Most of it is done in Asia. That left the service economy and finance. Service jobs create nothing but merely feed off the economy itself. Consequently, financial firms began draw money out to create investment packages that could sold to investment managers.

Mortgage companies began to make purchasing houses easier. As that went on, some major firms not only made it easier, they made it impossible to resist. This drove up home prices, which created incentives for builders to build more homes. Wall Street and major business insurance firms began to see this as the one area that was growing and so they created investments in the mortgages that were being sold. The initial mortgage-holding bank or mortgage lender sold the first mortgage, in a bundle of mortgages, to other financial firms, and very large insurance companies created supposedly secure insurance policies for these transactions.

But it was a smoke and mirrors. The investments in these mortgages, when prices began to level off, began to lose value. As they lost value, those investment people who didn’t know already that they were essentially worthless pieces of paper began to sell. The whole process began to lose value. The more it lost, the more people tried to get out. The more they tried to get out, the less and less was the value of that investment.

As the speculation began to disappear, the bubble burst and the economy started to level off, then tumble. Real estate values fell. Construction stopped. Real estate stopped selling. Values fell farther and faster. Large numbers of people began to lose their homes as they could not afford the payments on a house that they could not sell as it was worth much less that what they had paid for it.

It happened quickly. Who were the people who lost money? The investors with the big investment firms that had been betting on this stuff while putting very little of their own capital into it. And they were losing it, not for themselves, but for pension funds and endowments and trust funds.

Soon, not only the mortgages but the entire real estate industry was losing money. Then the stock market began to lose money. It had been inflated from the other speculative areas of the economy and dropped from about 14,000 down to 11,000 over a year and then dropped dramatically in less than six months to roughly 7,000. In October of 2008, just before Obama was elected, Bush’s Secretary of the Treasury and his Federal Reserve Chairman told Congress that Wall Street was broke and they would need $700 billion to bail them out. Congress reluctantly agreed.

At that point the entire business community was in full flight. Unemployment was climbing at terrifying numbers. In January of 2009 alone, President Obama’s first month in office, over 760,000 jobs were lost. Seven million were now unemployed and another several million could only find part-time work. Unemployment continued to grow, but thankfully, when a stimulus package was introduced in March, it began to slow down very gradually. By January of 2010, job losses were under 100,000 and state jobs—fire, police, nurses, teachers–that had been in jeopardy were now for the most part solidified.

This is where we are now. And yesterday, the President said through various White House staff members and a handful of members of Congress that he would begin to cut various parts of government…other than social services, including VA, and other than the military and homeland security…to try to stem the huge outpouring of money that the government spends.

The government now gets 15% of GDP in revenues. That is the lowest amount since 1926. And it spends 26% of GDP, and that is the all time highest except for the period during World War II.

But here is the problem. If we do not have jobs, since only 7% of the 15% of GDP we get in taxes is paid by corporations, we need individual taxpayers to get back to work. There is a solution.

In the mid 1930s, when unemployment was 25%, Franklin D. Roosevelt, expanded the jobs program started by Herbert Hoover. He created all kinds of jobs in all areas of public projects. This not only cut the unemployment rate rapidly down to 15%, but it began to kick-start the economy. Roosevelt was persuaded that things were going so well that he could cut back on this program in 1937. He did and the economy went into a tailspin and within six months unemployment was up to 19% again. So he put the foot on the accelerator again, and the unemployment dropped down to 15%, then gradually lower. Still, private investment did not take hold until the early 1940s, when war production took hold…but even this was government initiated and financed.

The lesson is quite clearly this: only government can step in at a time like this and kick-start the economy. Not only are financial institutions structurally unable to do it, but they are too afraid to do it. And reasonably so. No one wants to be the first one to lose his shirt trying to come out of a Depression or the last man to die in a war.

We could easily create 5 million jobs in a variety of governmental projects that are already underway. The government could automatically see to it that these public projects, many of which could be turned over to private industry as they develop, are accelerated and have underwriting, which costs the government nothing if they turn out well. Even if some do not turn out well, others will create enough profits, as Chrysler did and as we now know General Motors will do, to pay the government a handsome profit.

An example is the energy grid. We must streamline our energy grid. It has been estimated that we could create a million jobs alone on the advancement of this project which is of the same scale as the numerous and valuable dam projects in the Southeast and Southwest in the 1930s.

We know that every million jobs will create another million jobs in the service sector. So the grid could easily create two million pretty good jobs…one million of which would be in the private sector.

Next, we must raise taxes. We have hedge fund managers making multi-millions even over a billion a year who pay 15% on their incomes. We must either make these people pay a much higher percentage, at least 20%, and perhaps over a ten-year window, 25%, they will still have more money than they could ever spend in a lifetime. Another option is for those with extremely high incomes to simply alternatively reinvest those income amounts in job-producing projects and pay no taxes on them.

Finally, we need to stop the outflow of both jobs and manufacturing from the United States. We will always have imports from companies in other countries. But when, in a time of crisis, American manufacturers have incentives to both manufacture and hire even customers service and IT people abroad, as well as locate headquarters abroad, the time has come for a re-appraisal of government policies.

A small 2% tax should be levied on all products entering the country from abroad, for sale within the U.S. market by U.S. companies. If you make it abroad and you want to sell it in the U.S., you need to pay-to-play. The funds from those taxes would be used specifically to create large pools of venture capital underwriting for new manufacturing ventures in the United States. The amounts of money would run annually into the tens of billions. Every billion could create 25,000 permanent, private-industry manufacturing jobs that would generate more than $1,000,000,000 in GNP and taxes of at least $200 million a year.

And this need not cost a penny. If we decide, as the President says he wants to do, to cut our government spending…let’s cut government spending way back in some areas and cut government by half of what we identify. Then lets use half of the spending cuts…money that would have been spent anyway…to create jobs. Cut a billion, spend half a billion on new job creation. Then, next year, or the year after, simply gradually close down those government jobs and lay off those employees.

Everyone understands that it is not as simple as this scenario makes it out to be. But it is not the difficulty that is the impediment. It is the resistance of those lobbyists whose projects will be terminated in favor of jobs for the unemployed that will be the impediment. It is time that we let the lobbyists look for better ways to make a living and put our government back to work to do something valuable for the People.

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