Six months of railing against business rather than finding ways to encourage entrepreneurs to expand and hire has left the Obama administration with egg on its face. “Pass my $800 billion Stimulus Plan and unemployment will not exceed 8%” was the Obama administration mantra. Well we passed it, and unemployment will soon exceed 10%. President Obama said his Stimulus Plan would save or create 3.5 million jobs in the next two years. This cornucopia of 1960′s “Great Society” style social programs misbranded, as a Stimulus Plan has not produced jobs and worse still is unlikely to produce any permanent private sector jobs. Maybe a few hundred thousand temporary infrastructure jobs will be created over the next year or two but that is the best we can hope for from the ill conceived plan.
The reality… For the unemployment rate to fall, we must not only increase the number of jobs, but that increase must exceed the expected increase in the size of the labor force. In other words, merely increasing the number of Americans working will not necessarily decrease the unemployment rate. Today there are 154 million Americans in the labor force and just to maintain the status quo, 2.0 million new jobs must be created annually (a 1.3% increase). Just to stand still, we need 167,000 new jobs every single month. More than 85% of the permanent jobs must come from the private sector.
As if to add insult to injury President Obama has chosen to support the “Waxman-Markey global warming bill” over creating new jobs. A study by Charles River Associates concluded that if Obama signs off on the Congressional proposal to reduce CO2 emissions, it would have a serious impact on the availability and cost of energy. “By 2025, just 16 years from now, the cost of natural gas would rise 56%, electricity 44% and motor fuel 19%. Annual household purchasing power would annually decline by an average of $1,827. And America will lose 3.2 million jobs.” Obama can choose to placate his base and hope that the creation of “Green Jobs” will at least partially offset this loss or he can choose to use his influence to eliminate the more draconian aspects of the legislation and offend the left.
I am sure that President Obama is aware that Energy use is the direct correlate of a vibrant economy – in the United States for example; we consume 24% of the world’s oil and are responsible for approximately 28% of global GDP. We cannot just reduce our energy consumption, we have to replace it with new cleaner sources or the economy will suffer. It should also be clear that when the economy is weak it is the poor and the less educated that bear the brunt of the burden. For example, the current 9.4% unemployment rate is not equally distributed: the unemployment rate for college graduates is 4.8%, for those who have not graduated high school 15.5%, African American men 16.8% and for African American men and women under 20 it is a whopping 39.4%. As the old song says you always hurt the one you love -especially if you cater to your elite base.
We often appear to ignore the intrinsic reality that all life is carbon based and that at the moment all accessible large-scale sources of energy save nuclear and hydroelectric, are correspondingly carbon based. As a World Street Journal Editorial on August 5, 2008 pointed out, “The U.S. has a great deal invested in fossil fuels not because of a political conspiracy or because anyone worships carbon but because other sources of energy are, right now, inferior”.
Obama will have to make amends for his thoughtless bombastic rhetoric – Greedy Wall Street bankers! Hedge fund moneylenders! Speculators! Shameful profiteers! – If he hopes to gain the support of American business and create the jobs that America needs to reduce the unemployment rate.
Here are a few of my suggestions for correcting the economic blunders of the past six-months:
1. Entrepreneurial Incentives – In the short run we should help finance innovative ideas in all areas, including green technology, telecommunications, biotechnology, nanotechnology and all other embryonic inventions that will improve our lives. Since so much capital is sitting on the sidelines in Treasury Bills, let’s suspend future capital gains tax on any investment that is made in new technology for the next year. We have absolutely nothing to lose. If capital stays on the sidelines we will create no jobs and collect no additional taxes. If, however, the money is invested, we could create hundreds of thousands and possibly millions of permanent jobs and collect income taxes from every employee rather than paying them unemployment benefits.
Yes, we can create jobs without spending the taxpayer’s money and simultaneously help all those budding entrepreneurs currently starving for capital. Critics will say, “Another tax cut for the rich”. The potential loss of capital gains taxes 20 or 30 years hence when these entrepreneurs sell their companies is insignificant when discounted to current dollars, literally pennies on the dollar.
2. Accelerated Depreciation – If we allow businesses to fully depreciate their capital expenditures in the first year of a jobs plan, it will go a long way to stimulate our manufacturing base and maintain and possibly increase employment in 2009 and 2010. Although not necessarily equal, there is an offset between the loss of revenue from business and the increase in revenue from greater employment.
3. Issue 1 million “green cards“ – Over the next 12 months, issue green cards to well-educated immigrants who have the resources and will to commit to starting small businesses, which are the greatest engine of job creation in the U.S. Priority should be given to those who want to create export companies. We will create millions of jobs, reduce our surplus housing inventory by 1 million units, sell a large number of cars and reduce our balance of trade at no expense to the U.S. taxpayer. Such a plan would also increase our most important natural resource, intellectual capital.
4. For those who may worry that I’m unrepentant tax cutter at a time when deficits are exploding, I say -”Cutting Marginal Tax Rates Won’t Work” – Such cuts should not be included because they would probably not be as helpful as they have been in the past. When President Ragan did it, marginal rates where high, 70% and there was a clear benefit to reducing them. Using a physics analogy a 70% marginal tax rate created massive economic potential energy, which was converted to economic kinetic energy by dropping the rate to 28%. Today, marginal rates are not high enough to store potential energy, and cutting them will generate little kinetic effect. But we can revisit this when the current tax cuts expire at the end of 2010 and all the new Obama taxes are implemented. Rates will then be high enough that cutting them may make a difference.
5. Government at all levels has an important role to play in creating high paying jobs for the future, Education – Over the long term we must improve our performance because we are falling behind other sophisticated OECD countries, particularly in mathematics and science, and that does not augur well for the future. We are the nation of ideas and innovation, we will never be able to go backward and compete for unskilled jobs in a global economy. Our children are our future – but only if we educate them.
I’m sure there are many other innovative ways of creating jobs. I invite you to share your thoughts.