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Solutions: How to Reduce Unemployment
Solutions: How to Reduce Unemployment
September 27, 2009
Originally published in The Washington Times
Federal Reserve Chairman Ben S. Bernanke recently said the recession is probably over, as third-quarter growth in gross domestic product will likely be positive. But as jobs are a "lagging indicator" of economic cycles — employers don't hire until they get signals that times are good — unemployment may still go above 10 percent. For those out of work, statistics pointing to recovery are often cold comfort.
Unfortunately, some of the "cures" offered by politicians also offer little comfort in reducing unemployment. In fact, they will likely make things worse.
"Green jobs" is the solution most bandied about by politicians as a way to create new jobs in "environmentally correct" industries, such as wind and solar power. But it's just the latest elixir that builds on the shaky platform of job creation through taxation, spending and regulation. The only way the government can foster sustained job growth is to remove tax and regulatory obstacles to job creation in the private sector.
While there certainly are some jobs created by new government spending compliance with government regulation, the key focus should be the number of net new jobs. And most often the result of big government schemes is net job loss.
This is because the costs of regulation prevent businesses from hiring new workers they would have otherwise employed, and government spending "crowds out" — in economic terminology — business spending through tax hikes or massive borrowing that raises interest rates for the private sector. And since often the jobs created by these schemes cater to politicians' wants rather than market needs, they often are not sustainable without continuing infusions of federal money.
During the Depression, for instance, unemployment continued to hover around 20 percent despite President Franklin D. Roosevelt's heavy spending on public works programs. As University of Ohio economist Richard Vedder has written, "The massive Works Progress Administration of the 1930s employed 3.3 million (the equivalent of 10 million today) at its 1939 peak doing infrastructure projects, but unemployment remained in the double digits."
"Green jobs" seems to fit this classic pattern of government schemes that result in net job losses. Last year, Peter Orszag, then director of the Congressional Budget Office and now director of President Obama's Office of Management and Budget, testified that limits on carbon dioxide emissions in cap-and-trade regulation before Congress "would reduce demand for energy and energy intensive goods and services and thus create losses … for workers in the sectors of the economy that supply such products." To make whole the jobs that were lost in these sectors, government would have to start a vicious cycle in which it would spend more money, which would likely result in tax hikes that would kill jobs elsewhere in the private sector.
If this evidence of harmful effects weren't enough, there is also the issue that there is no standard definition of what a "green job" is. Some researchers for instance, do not count jobs created in the nuclear industry as "green," despite the fact that nuclear power does not emit carbon dioxide or pollutants. The government probably couldn't even measure what the effect of its "green jobs" spending and mandates would be.
Fortunately, there is a lot the government can do to remove its own barriers to job creation in the energy industry and the economy at large. It can cut taxes to encourage investment, or at the very least not raise them.
Lawmakers also should consider deregulatory measures like the "No Cost Stimulus" bill introduced by Sen. David Vitter, Louisiana Republican. This legislation would create an estimated 3 million new jobs by opening closed areas of the Outer Continental Shelf for oil and gas exploration, and streamlining the licensing of nuclear power plants. This also would create royalty revenues for the government that the bill directs to a new trust fund that can promote renewable energy.
Congress also should pare back job-killing mandates like those embedded in the Sarbanes-Oxley Act of 2002, which was rushed through Congress in the wake of the Enron and WorldCom scandals. This law has showered business with massive accounting procedures that may have created jobs for auditors — the law is often called the Accountants Full Employment Act — but discouraged business expansion by making it so costly for a firm to raise money by going public.
The American Electronics Association has calculated that the compliance costs of just one section of the law costs public companies $35 billion a year, and University of Rochester researcher Ivy Zhang calculated that Sarbanes-Oxley has cost the U.S. economy $1.4 trillion in direct and indirect costs.
Furthermore, University of Pittsburgh researcher Kenneth Lehn and colleagues found that the law directly diverts money into accounting compliance from job-building research and development spending of innovative businesses. This is hurting the research-intensive industries of tomorrow, including, ironically, the alternative energy industry.
In sum, a lot more good jobs could be created if government simply did a better job of not excessively taxing, spending or regulating.