What Is To Be Done? (Federal)

I note that I didn’t offer any prescriptions for solving the problem that I discussed in my recent post on unemployment. That’s no accident: I don’t think there are any quick or easy solutions to the mess we’re in now. It’s taken us 30 years to get into it; it may well take us 30 years to get out of it.

I’ve already sketched my general preferences for bringing fiscal sanity to the federal budget in this post. Unfortunately, while those things might end some of the distortions that currently plague our economy I don’t have an great confidence that of itself that will create jobs for all of the people who are unemployed, at least not in the near term.

IMO in the aftermath of two bubbles, the policies that caused the bubbles and those intended to remediate their consequences, and 80 years of distorting policy decisions in defense, healthcare, banking, trade, and agriculture we are faced with a Gordian knot that presents us with only two alternatives: unravel it thread by thread or cut it with unknown, frightening, and, likely, cruel consequences.

I think there are four things that we must do.

1. Rationalize our relationship with China.

China’s foreign exchange reserves are nearing $3 trillion. That’s either a third or three-fifths of China’s GDP depending on how you determine GDP, purchasing power parity or official exchange rate. The closest competitors are Japan, whose foreign exchange reserves are a quarter or a fifth of their total GDP depending on how you calculate it, and the EU taken as a whole, whose foreign exchange reserves are 5% of GDP taken as a whole.

China’s policy is deeply destabilizing to our economy and, let’s be frank, every American does not have the ability to be a physician, lawyer, or engineer. Most do not. We can’t export all of our manufacturing jobs to China and all our lower echelon white collar jobs to India and expect there to be jobs for average people here. We managed for a bit more than a decade by creating bubbles. That’s not a sustainable policy.

We need more people involved in direct production because those are the jobs they can do and we can’t have more direct production in the United States until we rationalize our relationship with China.

2. Recognize that we’re not as rich as we thought we were.

For a decade we thought we were a lot richer than we proved to be. During that decade a lot of people got raises that we just can’t afford. Total payroll is what I’m talking about here. In private industry, unfortunately, the way a reduction in payroll is usually realized is by firing people. Private industry has cut jobs to the tune of something like 11 million over the last three years.

The public sector has yet to reduce payroll. My preference for doing this would be to roll back payscales, particularly in the federal government, to 2000 levels. We should also convert benefits to defined contribution rather than defined benefit plans but I’ve already expressed my preferences for those. In preemptive response to those who complain that pay levels need to be maintained to compete with private industry I wish them Godspeed.

3. Stop importing an unskilled or semi-skilled workforce.

I have no opposition to immigrants or immigration. We should be accepting as many highly skilled workers from overseas as are willing to come here. I see no reason whatever to import an unskilled or semi-skilled workforce. We have plenty of people here already who are unskilled or semi-skilled. The effect of importing more unskilled or semi-skilled workers will be to further reduce the wages of those already here below their already low levels.

4. Stop subsidizing people who don’t need subsidies.

This should go without saying but apparently not. It’s not just that we’re subsidizing the healthcare and retirements of those who don’t need subsidies but that we’re subsidizing lawyers, bankers, and who knows how many other people who don’t need help. We may well need to save banks; why do we need to save bankers while we’re at it?

4 comments… add one

  • We can’t export all of our manufacturing jobs to China and all our lower echelon white collar jobs to India and expect there to be job for average people here.

    Put a laser-like focus on the processes, regulations, taxes and subsidies that intersect with international trade. The very first thing to do is to stop any subsidy that goes towards making processes which facilitate trade flows. No subsidies towards ports. No subsidies towards transportation infrastructure connected to ports, no subsidies towards providing security for ports, no federal grants for the expansion of ports. Ports and all associated intermodal infrastructure facilities should be self-supporting and further their operations should be taxed.

    The principle here is to not subsidize JIT manufacturing. As JIT becomes either more expensive or more inefficient that lessens the cost advantage over domestic production and it makes domestic production marginally more efficient by comparison.

  • john personna

    A good list. Not terribly exciting or controversial.

    I don’t think you can address #1 without a tariff, and that is still a long way from mainstream acceptance. It may remain so.

    I don’t think you can do much to change port costs in any other way. The shipping container revolution explains it all. There aren’t huge costs to subsidize, because the huge costs are gone.

  • PD Shaw

    Or we could introduce letters marquis to make the high seas more interesting.

  • steve

    Argh! Right good idea matey PD.

    Steve

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