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Logic, Not Emotions, Should Rule the Day

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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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About Kenn Jacobine

  • Not Original

    Something tells me you got the idea for the title for this “story” from someone else. possibly someone who has been virtually enslaved with a device that allows you to see his thoughts so that you may steal them? Hmmm?

    How MORAL of you.

  • http://www.google.com Tammy

    I have to agree with the above – this looks very like something I have already read…..

  • http://pajamasmedia.com/blog/author/danmiller/ Dan(Miller)

    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.

    Gosh darn! Common sense? Reasonable? They are like, so old fashioned; like, you know, so yesterday. We must ignore that the past is prologue and be empathetic. It’s great to be really cool. Besides, it’s only government money and therefore in limitless supply. Just because something has produced unfortunate results in the past does not mean that it will always do so in the future. This time may be different. Or maybe next time or someday. Doesn’t matter. We’re way cool.*

    Dan(Miller)

    *runs screaming and blubbering incoherently from computer to bury head in mud while pretending that it is sand to await the governmental largess to which he must be entitled.

  • Roger Choate

    This article ignores (perhaps deliberately?) the true facts about unemployment during the Great Depression. From a high of 23.6% in 1933 at the onset of the New Deal, it declined to 16.9% in 1936 and 14.6% by 1940. World War II and government war spending wiped it out altogether by 1942

  • Kenn Jacobine

    Then maybe we should start another world war? I forgot we have one the “War on Terror”. Roger, the economy took off only after FDR ended his New Deal programs and the government cut spending both domestic and military. In other words only after the government got out of the way. The same should happen today. All this spending, totaling over $3 trillion at last count hasn’t worked. It is time to cut spending including unemployment benefits.

  • http://www.lewrockwell.com/armentano-d/armentano25.1.html Kenn Jacobine

    Just happened to come across an article proving my point. Click on my name

  • Mark

    While I agree with the author’s implied critique of the role of debt in crises and with his sentiment that the Federal government should ‘stand down’ — comparing unemployment stats from the Great Depression and those from our present recession isn’t straight forward…imagine the US today with U3 spiking to just south of 25% and U6 north of 35%. That would present a qualitatively different political scene closer to what the country experienced in the 30s.

    Further, as concerns the immediate post-war period in the US, unemployment, which had reached (virtual) 0 in 1943, was at around 7% (U3) and 14% (U6) by the time Korea rolled around indicating that the private sector had been unable to expand to absorb many of the returning GIs. Military spending as a percent of GDP, which dropped from about 37% in ’45 to 4% in ’48 was back up at 14% in ’52 and remained in double digits throughout the 50s indicating significant government investment involved in the growth of the economy during that period.