From “Spreading The Wealth” To “Spreading The Misery”

12 Oct

Misery loves company.  From the demonstrators on Wall Street, to the halls of Congress, that destructive but all too human impulse is rising to the fore.  The potential result – policies that spread the misery — now stand as a potential and potent threat to the economic outlook.

There is certainly more than enough misery to go around.  With the unemployment rate at 9.1%, and the 12-month change in the CPI at 3.77%, the “misery index,” the sum of the two, in August was 12.87, its highest level since May, 1983.  And, last week’s report that the unemployment rate remained stuck at 9.1% in September means economic misery remains high.

The fact is the growth in the U.S. economy and the consequent job creation remains anemic at best.  The September jobs report was good news only in the sense it provided some evidence that the U.S. economy was not slipping into another recession.  Nonfarm employment edged up by 103,000, reflecting in part the return of 45,000 Verizon workers who had been on strike in August.  Revisions to the July and August numbers also show an additional 99,000 jobs were created in those two months.  But, the three month average remains below 100,000 new jobs a month, far below the number needed to bring down the unemployment rate.

In addition, wage gains continue to lag the increase in the price level.  During the past year, consumer prices have increased 3.8%.  But average hourly earnings are up only 1.9%, and the average weekly earnings of production and nonsupervisory workers are up only 2.2%.  The net result: more than a 1.6 percentage point cut in real wages for the average American worker.

With little relief in sight, there are strong grounds for those most affected to take to the streets and demand change. The young, minorities, the disadvantaged and a huge slice of the middle class who were promised they would benefit from the massive increase in the government’s control over the economy are beginning to realize that they are, in fact, bearing the burden of those policies through unemployment, limited job opportunities, and falling living standards.  Worse, those who were supposedly going to pay are still doing just fine.

Adding to the resentment against those who have managed to prosper are the government bailouts of Wall Street firms, the politically connected, includingGeneral Electric, and the United Auto Workers, and, let’s not forget, the wasting of billions of dollars on “green jobs.” As it turns out, empowering government in the name of the greater good inevitably means empowering the special interests and the rich with political pull.

No wonder the chant of “tax the rich” has such appeal.

Faced with the stark failure of their policies to create jobs or to produce a “more just” society, progressives are replacing “spread the wealth” with “spreading the misery” as their polar star. Thus, President Barack Obama champions a so-called “jobs bill” calling for the very same policy mix that produced today’s high misery index. Targeted and temporary tax cuts and another massive increase in government spending are to be funded by permanent increases in tax rates on so-called millionaires and billionaires — those who make more than $200,000 a year.

This plan puts hope over experience.  If government spending could produce jobs, Greece would be a booming economy instead of the basket case of the Eurozone. For every dollar spent by government, a dollar has to be taken from the private sector. Only if it is at least as productive as the private sector can government spending lead to an increase in employment.  Otherwise, government spending reduces the resources of the economy by imposing involuntary, one-sided exchanges.   But, real jobs are created and society’s wealth is increased when individuals are free to discover exchanges that are mutually beneficial.

A permanent increase in marginal tax rates may spread the misery to those with higher incomes, but it will kill, not create jobs in the U.S. economy.  Personal income tax rates are the equivalent of a tariff on the employment of U.S. workers. The higher tariffs are, the less trade, or in this case, less domestic commerce takes place.  Higher domestic tariffs on small business men and women, for example, reduce their cash flow while reducing their opportunities to engage in activities that produce an acceptable, after-tax return on their capital employed.  Less trade,  fewer jobs and a higher misery index are the result.

Bi-partisan support for the Chinese Trade Bill is another threat to the outlook. The bill would supposedly save U.S. jobs by raising the price of Chinese imports by 25% by either forcing the Chinese to raise the value of their currency relative to the dollar, or by imposing 25% tariffs on Chinese made goods.  The idea:  spread the misery of the lackluster U.S. economy to the Chinese.

The rhetoric in support of this policy appeals to our pro-American instincts, and general sense of solidarity with our fellow citizens.  But if implemented, such a plan would only drive the misery index higher still.

First, raising the price of Chinese goods is the equivalent of legislating a pay cut for every American who now has to pay more for many of the goods at his or her local store. Second, paying more for Chinese imports means we will have less money to spend on other goods and services, most of which are provided by American workers.  So, while a few jobs may be saved and the profits of favored U.S. corporations protected, thousands of jobs no doubt would be lost.

Nor can government create jobs by imposing new regulations on the economy. This truth is demonstrated by the price controls on debit card swipe fees mandated by the Durbin Amendment to the Dodd-Frank “financial reform” bill.  On October 1, these fees were cut to about 24 cents from 44 cents per transaction.

Faced with an estimated $6.6 billion reduction in revenue, banks are introducing monthly debit card fees of as much as $5 on those with smaller bank balances. Other banks are cutting expenses and employment. To offset the lower swipe fee revenue,International Bancshares Corporation (IBC) of Laredo, Texas, for example, will close 55 of its smaller branches located in grocery stores and eliminate 500 jobs. In effect, the Durbin amendment transfers income from middle and low-income individuals to merchants, who now pay lower fees, or leads to higher unemployment.

Misery may love company.  But policies that spread the misery are not the answer.  The true polar star for moving forward is increasing the liberty of the American people.

Reduce the barriers to the expansion of private business.  Acknowledge and reward success through private initiative.  Condemn riches gained through political connections and government largess.  Reduce the scale, scope and burden of government.  Trust  in the ability of individuals living within communities to manage their lives, pursue happiness and create a better future for themselves and their families.

Full Disclosure:  I am a member of Herman Cain’s team of economic advisors.

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