Washington is an emotional basket case right now. Besides the looming partisan all out war that will come with divided government, in its lame-duck session, Congress is currently struggling with the heartrending issue of whether to extend unemployment payments for over 2 million Americans that have been on the dole for close to two years. On the one hand is the difficulty of denying federal largess to people in a horrendous economy. On the other hand is the need to rein in federal spending and stop disastrous policies that are making economic recovery impossible. What is needed by Congress to make a good decision on this issue is logical thinking, not the super-charged emotional sound bites, diatribes, and appeals to our vulnerable human sensitivities
The problem with our current economy is that we just experienced the popping of the mother of all economic/financial bubbles, and the reaction of our government to it has been to attempt to re-inflate it with stimulus spending, bailouts, and quantitative easing. Common sense alone would indicate to any reasonable person that more of the spending and cheap credit that got us into this mess is not going to get us out of it.
Thus, since it was a housing bubble in particular, housing prices nationally have experienced deep drops in value. You see, all the cheap cash and credit the Federal Reserve and Uncle Scam provided between 2001 and 2007 was mal-invested into too many homes at prices that too many borrowers could not normally afford. When interest rates were raised by the Fed, and this always happens in boom and bust cycles, millions of Americans could no longer live beyond their means. They defaulted on their mortgages. A cavalcade of foreclosures transpired and home prices dropped. At the beginning of the housing collapse, the federal government should have let the market liquidate the mal-investment and allow the artificially high housing prices to drop. By now, the housing market would be recovered. Instead, Washington attempted to “stabilize” the housing market by instituting programs to prop up unrealistic values, and here we are over two years later with no signs of recovery in sight for the housing market.
The same is true of the labor market. A person’s labor is bought on the open market just like houses, except payment is called wages instead of prices. During the Fed induced boom, companies hired too many workers and wages rose too high. The excessive hiring and wage hikes were based on the phony wealth that Fed policies were producing. No one believed the spending binge of the American consumer, fueled by all that cheap credit and “equity” in their homes would ever end. Well, it did end with the depletion of all that “equity.” Workers got laid-off and millions began collecting unemployment.
Now, there is no question that we have been and are currently in a financial depression exactly like the one experienced in the 1930s. Real unemployment rates of between 17 and 22 percent attest to that fact. In the 1920s the Fed’s easy credit policies, primarily low interest rates, and margin buying of equities, caused a huge stock market bubble. When that bubble popped in 1929, loans were called in, and it became apparent that Americans were broke. Instead of letting the market sort things out, both Hoover and Roosevelt spent lavishly and intervened on a scale never seen before in American history. The result was more than a decade of economic depression.
Fast forward to the first decade of the 21st century and it is déjà vu all over again. Both Bush and Obama have attempted to “stimulate” the economy out of depression with lavish spending. Once again the technique has failed. There is no doubt that much of the money, specifically unemployment payments, has been a humane attempt to deal with the personal hardships of those who have lost jobs. But, it can also be argued that sustaining unemployment benefits indefinitely has an even larger negative effect on recipients – the perpetuation of high unemployment rates.
As was mentioned earlier, during the phony Fed induced boom of 2001-2007 companies hired and wages rose too much. In order for recovery to take place in the labor market, wages must come down in the same way that home values have come down in the housing market. Unemployment benefits prevent that from happening because the government provides a floor for wages. In other words, if a person is receiving $400 a week in unemployment benefits why would they accept a job that pays less? They wouldn’t. Thus, employers are faced with either raising wages – a proposition fraught with peril and one they can’t afford in this economy or not hiring at all. Many are obviously choosing to not hire at all as is evident from the new unemployment figures released yesterday.
So, yes, it is hard to cut off those millions of Americans who have been collecting unemployment for close to two years now, but it is necessary to help those same people in the long run. Essentially, unemployment payments set a minimum wage that most employers cannot meet right now. If we clear away the emotional hyperbole and demagoguery of those that foolishly want to sustain unemployment benefits indefinitely we can begin to address high unemployment in America. The Great Depression ended only after Washington cut spending in 1946. This is a lesson we can ill afford to ignore. Logic not emotions should rule the day.
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