What to do with the economy?

Jobs

We are missing some 13.4 million jobs.  Unemployment costs the economy lost output and it costs families lost income.  It also afflicts people with a loss of a sense of self-worth and increases divorce rates and crime rates.  Unemployment makes people lose job-market skills and personal habits of discipline and planning.  American can’t afford to have this many unemployed people. 

The economy has to produce 125,000 jobs every month – just to keep up with the growth of the labor force.  But if we want the economy to recover, we need to produce more, many more jobs.  If we want full employment by the next election, we’d need to produce about 400,000 new jobs, every month, for four years. 

400,000 new jobs a month is not impossible and not unusual for recoveries.  But we haven’t been even close to that rate of job-creation in the last four years (the average since the recession ended has been 150,000).  It is clear that something has to change drastically.  The key is to restore business confidence.  Small employers and large employers have to become convinced that it makes sense to bet on the growth of the economy. 

A big step towards restoring business confidence would be to make fairly drastic revisions to the regulatory burden.  Businesses need to feel that government is on their side, encouraging competition, growth, and risk-taking, not second-guessing, limiting, or restricting economic activity.

Perhaps a more important step would be to put an end to regulatory uncertainty: businesses need to know what the rules of the game are, what taxes they will have to pay, what health-care costs they will have to face.  Bi-partisan cooperation, especially when it comes to reforming the tax code, needs to be quick, substantial, and effective.

Housing and Debt

An even bigger contributor to business pessimism is they high level of households debt, especially debt related to housing.  Because of the massive drop in housing prices (and the frantic pace of lending a few years ago), about a quarter of American households owe more on their mortgages than they own in their house. It is calculated that the amount of “negative housing equity” is $1.15 trillion. 

Until the rate of foreclosures goes back to normal, until the rules for refinancing are clarified and made more friendly to homeowners, until people are able to able to crawl out from under the mountain of negative equity, spending won’t recover, businesses won’t be confident and won’t contribute to economic growth, and banks won’t be safe.

A big step towards recovery, then, would be a fairly drastic but temporary reform to the bankruptcy code that would allow and encourage people to substantially reduce their debt burden.  This would impose huge costs on the banking sector.  But banks are holding nearly 10% of GDP, nearly $1.4 trillion in cash that they won’t lend and they won’t distribute, while at the same time they foreclose on millions of homes.

Saving

To give future generations the standard of living we enjoy, we need to save (and productively invest) nearly a third of GDP.  Today we save half as much.  Families save very little, and have been saving less and less for 30 years.  Government saves very little – it actually dissaves a lot.  The specter of bankruptcy for Social Security and Medicare are a fruit of this national lack of prudence.  Technical fixes won’t be more than more-or-less temporary patches unless the country, as a whole, saves more.

Government can begin by giving good example.  Not all spending is equal.  Not all government spending is bad.  Not all government spending is good.  Some spending is more valuable than other spending.  Spending to improve productivity – on education or infrastructure – is more valuable than other kinds.  We need to be courageous and generous.  Current beneficiaries of government generosity need to look hard in the mirror and perhaps accept smaller benefits.

But families can’t assume that they can blame Washington.  A family that doesn’t save 10% of its income is not being responsible towards itself or towards the country.  We need to learn to live more sober, simple, detached lives – or we’ll force our grandchildren to live lives of penury.

Immigration

America is a nation of immigrants.  Immigrants bring a great deal to the country.  Some bring high-level skills.  Others bring courage and determination.  Others bring family values.  They all bring a conviction that this country is better than the country they left.  America needs to open its arms very wide to all comers, especially those who look and talk differently, because they are the source of ideas and dynamism for an economy badly in need of both.

It’s wrong to come into a country breaking its laws.  But it’s also wrong to have laws that restrict entry into a country for no good reason.  Some people need to be kept out – criminals, terrorists.  Everyone else needs to be encouraged to come and stay, to play by the rules and give back.

For example, America devotes enormous resources to educate young people from abroad through our schools and universities.  The immigration regime does nothing to invite these well-trained, well-behaved students to stay: it should be reformed so that it grants permanent legal residency within a few semesters of good grades (and of respecting drinking-age laws). 

Another example: America also depends on immigrants to run many of its basic services and to produce much of its food.  It should offer a generous guest-worker program (even for current illegal immigrants) with a clear and simple path to residency that depends on obeying the laws and acquiring training and showing an attachment to the US Constitution.