Monday, November 2, 2009

Economists have it all wrong

From the Knoxville News-Sentinel November 1, 2009

I read somewhere that 80 percent of economists polled said the recession was over. Experience tells us that if 80 percent of economists agree on something, then they are wrong. Remember when these same economists said that the passage of the stimulus bill would keep unemployment below 8 percent? When have you ever heard it reported that "the results are what economists had predicted?" Never.

Instead, it's "the results are different than what economists had forecast." The obvious conclusion is that the recession is not over.

When asked to explain the dismal employment picture, we are told that this is a "jobless recovery." This is an oxymoron and the last five letters aptly describe those who utter it. There is no such thing as a "jobless recovery." The economy recovers when people go back to work.

What is transpiring now is that businesses are reluctant to hire back workers even with an uptick in demand. It is costly to hire workers and is cheaper to pay current employees overtime. More workers won't be hired until employers are confident that the recovery is not temporary. Employers also are uncertain about the future because of the potential job-killing likelihood embodied in cap-and-trade, some of the proposals bandied about in health care reform, the increase in the minimum wage and increases in marginal tax rates.

I wrote on these pages that the increase in the minimum wage would increase unemployment among those who are paid the minimum wage. So tell black male teenagers that the increase in the minimum wage has made them better off when their unemployment rates increased from 39 percent to 50 percent since its implementation.

One well-known economist in the Obama administration said the stimulus package has created 30,000 jobs. Really? Are they permanent ones? Do they offset the job loss just in the month of August, where large businesses laid off 60,000 workers, medium-sized businesses cut 116,000 jobs and small businesses cut 122,000 jobs?

I know the Obama administration has brought back the Jimmy Carter idea of a $3,000 tax credit to create jobs. But it is doubtful that this will have any impact since the tax credit is only $3,000 for the first year and disappears after the third year. If businesses hire, it will be mainly temporary workers until it is certain that the recovery has some permanence.

So what is to be done? First, the administration should acknowledge that the engine of job creation lies in small business. Small businesses employ 48 million people. Medium-sized businesses employ 42 million and large businesses employ only 17 million. Yet the administration seems to favor large businesses over smaller enterprises.

If the problem is uncertainty, then the administration should remove the uncertain future burdens inherent in its proposals. It should remove some of the costly burdens on business - especially small businesses - from the health care legislation. It should kill cap-and-trade. It should repeal minimum wages. It should keep the Bush tax cuts and not raise marginal personal tax rates. It should drastically cut the payroll tax. Then we will see a strong recovery along with declines in the unemployment rate.

Dr. Harold Black is the James F. Smith Jr. Professor of Finance at the University of Tennessee. He can be reached at

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