As The Wall Street Journal reports, we have about 14.9 million people unemployed.  There are 8.9 million involuntary part-time workers.  Right now, the unemployment rate is 9.6%.  If we include other people such as discouraged workers and part-time workers who can’t find full-time jobs, it jumps to almost 17%.  

Just imagine, one in seven Americans can’t find a full-time job!!!  That’s terrible for those suffering without a job and it’s awful for the economy as a whole.

The big question this week is will another tax credit plus another $50 Billion stimulus package change all this.  The answer from studying economics is NO!!!

The Wall Street Journal recounts some of the data …

Stimulus Package #1 increased Federal spending and offered temporary tax breaks.  The cost was $168 Billion.  Did it work?  The answer is NO!!!

Stimulus Package #2 was a combination of spending on social programs and one-time tax rebates for an incredible cost of about $800 Billion.  Did it work?  The answer is NO!!!

Stimulus Programs #3, #4, #5, #6, etc. including Cash-for-Clunkers, Home Buyer’s Tax Credits, Mortgage Payment Relief, Unemployment Benefits Extensions (now up to an astounding 99 weeks), etc.  Did they work?  It’s true that in places, they had some positive effects, but typically they were very minor or temporary effects.  Overall, did they work?  The answer is NO!!!

Keynesian economics has proven itself not to work year after year, in case after case, in country after country.  Why do we keep trying the failed policies of Keynesian economics?

The real answer to boost our economy rapidly and to dramatically increase the number of new jobs comes from pro-growth economics.  We need to cut taxes on economic growth.  We need to cut personal income taxes.  We need to cut corporate income taxes.  Plus, we need to cut capital gains taxes.  All tax cuts should be on a permanent basis.  Everyone needs to feel secure about the future.  We need to create a pro-growth economy based on economic freedom, not command-and-control and capricious big government policies.

By the way, allowing the Bush tax cuts to expire next year will tend to increase unemployment further.  It’s a recipe for further economic hardship. 

Choosing the Good Life Blog by Gerard Francis Lameiro, Ph.D.

In economics, we know that when we tax something, we get less of it.  We also know that when we subsidize something, we get more of it.  It’s just common sense.  Taxing something like smoking cigarettes, discourages smoking cigarettes because the price goes up for smokers.  Similarly, if we subsidize something, we encourage it because we create an economic incentive for that activity.

Incidentally, that’s why we shouldn’t tax income, savings, and investment.  Taxing income, savings, and investment is essentially taxing economic growth.  We want more economic growth and prosperity, not less.

So, Mr. Barro is right that subsidizing unemployment benefits beyond some reasonable level does not make economic sense.  Of course, as a society, we need to be compassionate.  Some individuals and families need help desperately.  But, at some point, we encourage people to stay unemployed.  The fact that during one of the worst times in this recession, March 2009, there were 3.9 million people hired (while 4.7 million people left their jobs), meant the economy was adding workers.  Would more people have been hired if their unemployment benefits had been close to running out?  The answer is – probably yes.

Indeed, the fact that the share of long-term unemployment (people unemployed for more than 26 weeks) hit a whopping 46.2% in June of this year, eclipsing any other recession since World War II, is a strong indication that we are encouraging people not to seek employment.

While the duration for unemployment benefits might be partially the cause of high unemployment this Labor Day, there are other root causes such as high taxes that continue to grow higher.

Choosing the Good Life Blog by Gerard Francis Lameiro, Ph.D.

Some signs are pointing to the very real possibility of inflation.  The Wall Street Journal this week reports that consumers are paying 4% more for beef in July than last December, plus the futures market for cattle has been up about 11% since July!  What’s the reason?  Well, certainly, foreign demand for American beef is one factor.  But, another important factor is simply that ranchers are afraid to invest in larger herds because of uncertainty over the economy.

Consider orange juice as another example.  Remember the days when you could buy those half-gallon, 64 ounce cartons of OJ.  Well, one well known company has cut the size of the carton down to 59 ounces while keeping the price the same.  That’s not a direct price increase.  It’s about an 8% quantity decrease.  For consumers, it still amounts to inflation.  They will pay more to get 64 ounces of OJ for their families.  One wonders if all those researchers who study inflation take into account cuts in quantity or quality as a source of inflation.  Or, do they just assume the products have the same quantity with the same price and therefore, inflation is zero?

Another example.  Many consumers are facing increased credit card fees.  Why?  Because of new big government regulations on banks, banks have been forced to cover expenses with increased fees.  That’s inflation for consumers who have to pay the higher fees.

With continued big government plans to spend, tax, borrow, and regulate our economy more and more, inflation seems likely in 2011.  How bad might it get?  The answer is probably tied to how long the current fiscal and monetary policies continue.

By the way, coming in September, my new book Choosing the Good Life: Two Competing Economic Visions for readers who want to understand economics from the point of view of a consumer.  It will be available in print and Kindle editions.  Consider getting yourself a copy.

Citizen Economics Blog – News, Analysis, Insight, Practical Knowledge by Gerard Francis Lameiro, Ph.D.

And, we are warned by business leaders about the high costs of creating new jobs as well as their fear, uncertainty, and doubt about the economy.  Many citizens are downright worried about high government spending and high borrowing as well as astronomical deficits and skyrocketing debt.   Taxes appear to be headed upward with the upcoming repeal of the Bush tax cuts.  New health care taxes and regulations come with high price tags.  Are we really experiencing an economic recovery?  If not, when will we recover?  Let’s talk about it now.

In my view, we are in a very modest recovery phase that is most likely a part of a double-dip recession.  I also believe that if we continue down the road with the current fiscal (spending and taxing) policies and the current monetary (money supply and interest rate) policies, the American economy will slip into the second recessionary dip.

These policies are zapping the private sector of the capital and regulatory climate needed to create new businesses and new jobs.  In addition, the new health care law is driving America toward a complete restructuring of about 17% of the American economy with the depressing effect on the economy of socialized medicine.  Moreover, there are added costs associated with the new financial regulatory law and worries about potential new carbon taxes and cap-and-trade taxes and regulations.   It’s a recipe for another major recession.

When will the American economy recover?  The answer is simple.  When we cut government spending, cut taxes on economic growth (income, savings, and investment), and cut government borrowing, the economy will take off again – just as it has done in the past.

Citizen Economics Blog – News, Analysis, Insight, Practical Knowledge by Gerard Francis Lameiro, Ph.D.

The first reason is very simple.  Taking money from the highly productive private sector of the economy means less capital formation (that is, less money from savers and investors that is pooled together to invest in new business).  Obviously, with less capital formation and diminished new economic activity, economic growth drops and tax revenues decline as well.

A second reason is more subtle and many within government seem to ignore it.  People don’t want to pay higher taxes and they will take action to cut their tax bill.  For example, a family might move from a State with an income tax that’s going up to a different State that has zero income taxes.  Or, if the tax rates are high enough, one member in a two-income household might quit work and just stay home.  This is especially true in higher income households that might feel the burden of higher and higher marginal tax rates.

Ironically, the very people who call for cutting deficits with higher taxes, don’t seem to realize that those higher marginal taxes will not only raise unemployment and cut economic growth, they will actually tend to raise deficits as well.

Back to Arthur Laffer’s article for an example.  Between 1968 and 1981, under Presidents Johnson, Nixon, Ford and Carter, tax rates went up.  What happened to tax revenues from the top 1% of taxpayers?  It dropped from 1.9% of GDP to 1.5% of GDP.  So, higher tax rates led to lower tax revenues as a percentage of GDP.

If we want to boost tax revenues, we better start cutting taxes.  Plus, if we want to try to avoid a double-dip recession in 2011, then we ought to cut taxes on economic growth now – by cutting taxes on income, savings, and investment.

Citizen Economics Blog – News, Analysis, Insight, Practical Knowledge by Gerard Francis Lameiro, Ph.D.

The unemployment statistics are not good.  After 18 months and $862 Billion stimulus, unemployment is at 9.5%, there’s a 5-to-1 ratio of job seekers-to-job openings, 6.7 million Americans have been out of work for at least six months, 2.5 million American workers will run out of unemployment benefits, and about 2 million jobs have been lost.

What can we learn from economics?  Without question, economists know that if you subsidize something, you get more of it.  Of course, many of us have heard anecdotal evidence as well of unemployed people who only seriously look for work right before their benefits expire.  More rigourous economic studies confirm that when unemployment benefits are extended, actual average unemployment duration increases.

What can be done?  No one wants to see the truly needy and unemployed suffer.  But, adding another $30B of deficit spending on top of $1.4 Trillion of deficit spending isn’t a great recipe for economic success.

The answer to the problem is not more unemployment benefits and it’s not more deficit spending.  It’s to create a lot more jobs in the private sector.  How do we accomplish this task?

The answer is a change in fiscal policies.  America needs to lower taxes on economic growth.  We need to cut taxes on income, savings, and investment.  We also need to cut big government deficit spending.  We can’t tax and spend ourselves into prosperity.

America needs pro-growth fiscal policies that have a proven track record of creating new jobs.  They worked in the past.  They will work again.  Will Washington wake up in time – before we get into a double-dip recession or worse, a depression?

Citizen Economics Blog – News, Analysis, Insight, Practical Knowledge by Gerard Francis Lameiro, Ph.D.

Investor’s Business Daily reported this week that economic optimism is down to a 17 month low, according to the IBD/TIPP Economic Optimism Index.  Separately, small business confidence is also declining with a lower sales outlook, according to the National Federation of Independent Business.  Why has economic optimism declined?  Are these results unexpected?  Let’s talk about this now.

The primary reason for the decline in economic optimism is the lack of jobs for those who are seeking work.  According to the IBD article, Raghaven Mayur, president of TIPP, a unit of TechnoMetrica Market Intelligence, believes the official unemployment rate of 9.5% “grossly underestimates” the jobs problem.  He thinks the true jobless rate might be as high as 22-25%.

These results are not unexpected if you follow the economy closely.  I think a double-dip recession continues to be a very real prospect, unless we change fiscal tax and spending policies.  2011 might see the next dip with the repeal of the Bush tax cuts.

Citizen Economics Blog – News, Analysis, Insight, Practical Knowledge by Gerard Francis Lameiro, Ph.D.

According to the article, the Federal Reserve policy is primarily helping big government finance its huge deficits and helping big banks pad their balance sheets.  With interest rates this low, big government can borrow at low rates.  Similarly, big banks can profit from the spread between their borrowing costs and their lending revenues.  So, near-zero interest rates favor big government and big banks.

If the “bigs” are winners, who are the losers?  Unfortunately, main street savers and investors.  People living on savings and investments such as retired people can’t make much money on their savings and investments.  In some cases, the managers of pension funds are taking larger than normal risks with their investments, hoping to make up for the ground lost with near-zero interest investments.  Also, States that depend on taxing wealthy individuals are running into budgetary problems because the wealthy can’t earn as much – and hence, don’t pay as much taxes.  Some States appear to be teetering on bankruptcy.

Near-zero interest rates favor big government and big banks.  Too bad main street savers and investors are not treated as well.

It still appears that a double-dip recession is likely at a minimum.  Some asset deflation also appears to be a reasonable expectation.  As to the possibility of a depression, I think it is too early to tell.  If fiscal (spending and tax) policies and monetary (money supply and interest rate) policies move from Keynesian to pro-growth, I think we can see a rapid recovery.  However, I currently have not seen indications of such policy changes.

Citizen Economics Blog – News, Analysis, Insight, Practical Knowledge by Gerard Francis Lameiro, Ph.D.

The impetus for The Wall Street Journal column was the recent Supreme Court decision that found that the “honest services fraud” law was too vague, thereby helping former Enron CEO Jeff Skilling gain a partial victory in his attempt to overturn his conviction.

Indeed, vagueness in a law is an issue.  Justice George Sutherland in 1926 even went so far as to say that a vague law “… violates the first essential of due process of law.”  The point is simple: if people can’t understand a law because it is too vague, then how can the government hold people accountable to it.  It’s a matter of justice and fairness.

In addition, vagueness is vitally important today.  Congress continues to pass large and unwieldy laws that most Americans don’t have the time or energy to read.  Even our Senators and Representatives often skip reading the laws that they are voting on.  Two examples are the health care bill and the financial reform bill.  Because parts of the bills lack specificity, we might all have to wait months or even years to see what they really mean and how they will impact America.

Economic growth is predicated on investment in new businesses, new products and services, and new jobs.  But, vagueness - in current legislation passed (such as health care) and in potential new legislation (such as financial reform, cap-and-trade, and VAT taxes) – means uncertainty.  Investors can be very reluctant to invest in a climate of vagueness and uncertainty.

Vagueness impedes economic growth.  Investors and economic growth both require a climate of reasonable rules and regulations, enforced under the rule of law, and low to moderate investment taxes.

Citizen Economics Blog – News, Analysis, Insight, Practical Knowledge by Gerard Francis Lameiro, Ph.D.

Yikes, a major depression.  Actually, I have been thinking the same thing for quite some time.  I think there exists a real chance we are in the beginning stage of another major depression, in many ways like the Great Depression and in some ways quite different.  Obviously, we are not close to a depression yet.  But, I think Krugman might still be right.  However, Krugman’s remedy of spending more is the WRONG answer.

Our economic recovery is currently very anemic.  But, I strongly believe the economy will be hit even harder in 2011 with an assortment of tax hikes and totally new taxes.  MORE taxes simply mean LESS money in the private sector to invest in new businesses, new products and services, and new jobs.  These new taxes and higher taxes will take their toll on unemployment numbers.

The current government policy we seem to be following is to increase taxes, increase spending, increase borrowing, and increase deficits.  There have been some notable exceptions.  But, in general, the government has a tax-and-spend mindset.  This is the precise opposite of a pro-economic growth policy which we desperately need now.

It is widely agreed that the various previous stimulus packages have failed to boost our economy.  Krugman’s policy answer will likely fail as well.  If our own economic history and data are not enough, just look at Japan’s record of attempting to stimulate their economy.  Keynesian economics didn’t work in Japan either.

Yes, we might be entering a depression.  If we do find ourselves in a depression, we can blame government policies.  But, the cause will not be too little stimulus spending.  It will be the lack of a pro-economic growth policy that emphasizes tax cuts for everyone.  Recall the Harding-Coolidge, post World War II, JFK, Ronald Reagan and Bush tax cuts.  In each case, unemployment was low and the economy soared.

Citizen Economics Blog – News, Analysis, Insight, Practical Knowledge by Gerard Francis Lameiro, Ph.D.  For more information, please visit: http://GerardLameiro.com .