Best of the Week
Most Popular
1. The Trump Stock Market Trap May Be Triggered - Barry_M_Ferguson
2.Why are Central Banks Buying Gold and Dumping Dollars? - Richard_Mills
3.US China War - Thucydides Trap and gold - Richard_Mills
4.Gold Price Trend Forcast to End September 2019 - Nadeem_Walayat
5.Money Saving Kids Gardening Growing Giant Sunflowers Summer Fun - Anika_Walayat
6.US Dollar Breakdown Begins, Gold Price to Bolt Higher - Jim_Willie_CB
7.INTEL (INTC) Stock Investing to Profit From AI Machine Learning Boom - Nadeem_Walayat
8.Will Google AI Kill Us? Man vs Machine Intelligence - N_Walayat
9.US Prepares for Currency War with China - Richard_Mills
10.Gold Price Epochal Breakout Will Not Be Negated by a Correction - Clive Maund
Last 7 days
Silver Outlook Is 'Excellent' - 23rd July 19
Why The Coming Silver Rally Might Be The Greatest - 23rd July 19
We Are in for Decades of Ultra-Loose Monetary Policy - 23rd July 19
Gold & Gold GDX Stocks Ripping. What’s Next? - 23rd July 19
Stock Market Breadth Warning Signs for the Stock Market’s Rally? - 23rd July 19
U.S. Recession Watch: The Six-Cycle Forecast - 23rd July 19
US Dollar Index tightly wound between: US Bond Yields down on safety flows - 23rd July 19
Stocks Bull or Bear? The Market’s Message - 23rd July 19
This Dividend Aristocrat Is Leading the 5G Revolution - 22nd July 19
What the World Doesn’t Need Now is Lower Interest Rates - 22nd July 19
My Biggest 'Fear' For Silver - 22nd July 19
Reasons to Buy Pre-Owned Luxury Car from a Certified Dealer - 22nd July 19
Stock Market Increasing Technical Weakness - 22nd July 19
What Could The Next Gold Rally Look Like? - 22nd July 19
Stock Markets Setting Up For A Volatility Explosion – Are You Ready? - 22nd July 19
Anatomy of an Impulse Move in Gold and Silver Precious Metals - 22nd July 19
What you Really need to Know about the Stock Market - 22nd July 19
Has Next UK Financial Crisis Just Started? Bank Accounts Being Frozen - 21st July 19
Silver to Continue Lagging Gold, Will Struggle to Overcome $17 - 21st July 19
What’s With all the Weird Weather?  - 21st July 19
Halifax Stopping Customers Withdrawing Funds Online - UK Brexit Banking Crisis Starting? - 21st July 19
US House Prices Trend Forecast 2019 to 2021 - 20th July 19
MICROSOFT Cortana, Azure AI Platform Machine Intelligence Stock Investing Video - 20th July 19
Africa Rising – Population Explosion, Geopolitical and Economic Consquences - 20th July 19
Gold Mining Stocks Q2’19 Results Analysis - 20th July 19
This Is Your Last Chance to Dump Netflix Stock - 19th July 19
Gold and US Stock Mid Term Election and Decade Cycles - 19th July 19
Precious Metals Big Picture, as Silver Gets on its Horse - 19th July 19
This Technology Everyone Laughed Off Is Quietly Changing the World - 19th July 19
Green Tech Stocks To Watch - 19th July 19
Double Top In Transportation and Metals Breakout Are Key Stock Market Topping Signals - 18th July 19
AI Machine Learning PC Custom Build Specs for £2,500 - Scan Computers 3SX - 18th July 19
The Best “Pick-and-Shovel” Play for the Online Grocery Boom - 18th July 19
Is the Stock Market Rally Floating on Thin Air? - 18th July 19
Biotech Stocks With Near Term Catalysts - 18th July 19
SPX Consolidating, GBP and CAD Could be in Focus - 18th July 19

Market Oracle FREE Newsletter

Top AI Stocks Investing to Profit from the Machine Intelligence Mega-trend

Does Anyone in Washington Know What Needs to Be Done to Create Jobs?

Economics / Employment Feb 04, 2010 - 01:11 AM GMT

By: Paul_L_Kasriel

Economics

Best Financial Markets Analysis ArticleThis is a question that I often get as I speak to groups around the country. Based on the ADP monthly survey of employment, small- and medium-sized firms (less than 500 employees each) are the fount (or black hole, as of recent months) of jobs in the U.S. economy (see Chart 1).So, rather than asking Washington career politicians what it takes to create more jobs, why don't we poll small businessmen and businesswomen?


Chart 1

In a sense, this is what the National Federation of Independent Business (NFIB) does every month. It surveys independent businesses each month about, among many things, what is the single most important problem they face. Presumably, if this problem were solved, these independent businesses would thrive and would be increasing their staffs. So, according to the "troops on the ground," what is the number one impediment to better business conditions and increased jobs in the economy? Too high taxes? Increased regulation? Too little credit? All of these problems have increased in recent months. But, by an order of magnitude, independent businesses report that their biggest problem today is poor sales (see Chart 2)! Can you imagine that? After a collapse in aggregate demand emanating from the longest and deepest recession in the post-war era, independent businesses need more demand for their products and services in order for them to step up their hiring. Why did not those career politicians in Washington think of this?

Chart 2


Some economists, of all people, actually did understand this problem years ago. Both J.M. Keynes, the founder of the school of economics named after him, and F.A. Hayek, an icon of the ultra-free-market Austrian school, both said that when the financial market is unable to create credit because of capital constraints and when private aggregate demand collapses, there is a role for increased government spending and central bank financing of that spending. Neither Keynes nor Hayek recommended such policies in "normal" times. In fact, Hayek argued that excessive central bank credit creation in normal times would ultimately lead to a depression.

But if, what he called a "secondary depression" was imminent or upon us, it should be avoided or mitigated by an increase in government spending and central bank credit creation to help finance the government spending. (For a discussion of Hayek's views on secondary depressions, see my July 30, 2009 Econtrarian "I Come Neither to Praise Nor Bury Bernanke." Neither Hayek nor Keynes believed that any good could be served by the deflation and unemployment that would accompany a secondary depression. In the early 1930s, it could reasonably be argued that the U.S. experienced a secondary depression. I believe that the U.S. was on the brink of secondary depression in late 2008.

So, maybe a combined program of increased government spending and abnormally-large increases in the Fed's balance sheet is just what these doctors of economics might have prescribed. For you see, aggregate demand is unambiguously increased when the federal government spends (or transfers spending power to other entities) and that federal spending is financed by credit created by the Fed. Increased aggregate demand for goods and services will trickle down to increased sales for small, medium and large businesses.

But some career politicians in Washington are arguing that the 2009 fiscal stimulus package, (The American Recovery and Reinvestment Act or ARRA) has been a failure. Others argue that the fiscal stimulus was too small, and another one is needed. Before we declare the fiscal stimulus a failure or enact yet another one, why don't we hold judgment until the ARRA has been fully implemented. You see, according to ProPublica, as of January 25, only approximately 30% of the $580 billion allocated spending in the 2009 fiscal stimulus program has actually been disbursed to date.

This is reflected in the latest GDP data. As shown in Chart 3, nominal federal government nondefense infrastructure spending contracted by 5.3% on a year-over-year basis in Q4:2009. Although nominal state & local government infrastructure spending was up 2.7%, this looks to be more of a business-as-usual-spending increase than anything out of the ordinary. Of course, had it not been for "Build America Bonds," an element of the fiscal stimulus program whereby state & local government issuers of taxable bonds to fund infrastructure projects receive an interest-cost rebate from the Treasury, this modest growth in local government infrastructure spending would have been less. The point is that there is approximately 70% of spending fiscal stimulus and approximately 56% of tax-cut fiscal stimulus still in the pipeline.

Chart 3


In sum, if what small- and medium-sized businesses need to increase their hiring is increased sales, then it would seem that fiscal stimulus coupled with Fed-created credit is the right medicine. In total, only about 33% of the combined tax-cut and spending in the ARRA has been allowed to stimulate. So, before we decree that the ARRA has been a failure or before we enact a supplemental program, let's see how the current one plays out when more of the funds have been dispersed. Come to think of it, perhaps some career politicians in Washington do know something about helping small businesses to create jobs when faced with the prospects of a secondary recession.

Note: For an interesting read on Keynes, Hayek, Friedman and other luminaries of economic philosophy, pick up a copy of Bruce Bartlett's new book, The New American Economy. Rather than accentuating the differences among these luminaries, he discusses some important common ground among them, which is relevant in the current economic environment. Regrettably, I have no monetary interest in the sale of this book.

Paul Kasriel is the recipient of the 2006 Lawrence R. Klein Award for Blue Chip Forecasting Accuracy

by Paul Kasriel and Asha Bangalore
The Northern Trust Company
Economic Research Department - Daily Global Commentary

Copyright © 2010 Paul Kasriel
Paul joined the economic research unit of The Northern Trust Company in 1986 as Vice President and Economist, being named Senior Vice President and Director of Economic Research in 2000. His economic and interest rate forecasts are used both internally and by clients. The accuracy of the Economic Research Department's forecasts has consistently been highly-ranked in the Blue Chip survey of about 50 forecasters over the years. To that point, Paul received the prestigious 2006 Lawrence R. Klein Award for having the most accurate economic forecast among the Blue Chip survey participants for the years 2002 through 2005.

The opinions expressed herein are those of the author and do not necessarily represent the views of The Northern Trust Company. The Northern Trust Company does not warrant the accuracy or completeness of information contained herein, such information is subject to change and is not intended to influence your investment decisions.

Paul L. Kasriel Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Comments

dpscll
04 Feb 10, 10:25
Only one way to create jobs at this point

Last week Obama announced the planned infusion of $30 billion in taxpayer money to small banks to jumpstart lending to small business. Imagine that. Giving more interest-free money to banks so they can in turn fatten their bellies by lending it out at usurious rates to struggling businesses. Sadly, the only alternative at this late juncture is to bring back the New Deal tactics of FDR with massive government investments in infrastructure projects. It would not only put millions to work, but it would begin to fix our badly deteriorating roads and bridges in this country and help abate our dependance on oil. Sure beats handing out more welfare to banks, right?


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules