More Job Cuts, Less Unemployment?

Next time you feel compelled to speak out for better funding of state educational institutions, remember that when conducting addition in Gov’t Mathematics, 1+1 = 0.5

From Fox Business:

The U.S. economy lost 20,000 jobs in the month of January, the Labor Department said Friday, but the nation’s unemployment rate fell to 9.7%. Stock futures reacted positively to the news.

The drop in the unemployment rate was surprising — economists were looking for an unemployment rate of 10.1% — but was related to fewer Americans actively looking for a job. The amount of “discouraged” job seekers, or Americans not actively looking for a job because they don’t believe work exists, rose to 1.1 million in January compared with 734,000 a year ago. [emphasis added]

Americans continue to lose jobs, while the so-called recovery is tepid, at best.  Curiously, government reporting is such that although more people are unemployed, once those people reach of a point of sufficient discouragement and totally give up looking, they are no longer officially unemployed.  Hence, the impossible scenario of the nation experiencing more job losses and simultaneously a lower percentage unemployed.  Instead, those who give up are wafted into a pool of  “discouraged” workers, separate and distinct from the unemployed.  This is a convenient way to mask what is, in reality, an economy advancing toward more serious decay.

Obama has been in office for a full year.  TARP has “saved” the banks, and “stimulus” has had its affect “saving or creating” jobs.  Really?  The current malaise is the result of TARP and stimulus – slashed interest rates, a continuing a policy of easy money, “stimulating” failed businesses and industries, and a refusal to allow a market correction to take place.  Additionally, in the last year, Congress has  raised the Federal minimum wage, further interfering with the necessary corrections in the labor market.  Taken as a whole, this unprecedented intervention is aggravating the price adjustment process of labor, interest rates, and commodity prices.

Trade – i.e. interpersonal exchange of economic goods – is the fundamental action behind all economic development.  It is through trade that civilization realizes the gains made possible by the division of labor.  Trade happens when there is a meeting of the minds; when two (or more) independent parties both agree that exchange is mutually beneficial.  When the costs to both parties are expressed in money, we call them “prices.”

Regardless of what anybody else tells you, be it President Obama or Chairman Bernanke, price fixing in any form necessarily leads to less economic activity, and I’ll prove it to you right now.

Imagine you and I are bargaining in a simple world where you are the monopolist of widgets, and I the monopolist of doodads.  We each desire some variety in life, and would like to trade.  Through a process of negotiation, we agree to exchange 3 widgets for 5 doodads.  But there is a third party, government, which decides (arbitrarily) that in fact widgets and doodads are equal in value, and must be exchanged on a 1:1 basis.  Government illegalizes trade at any other ratio.  Now, three things are possible:  1) We renegotiate our deal on a 1:1 ratio, if such an arrangement is permissible by both parties.  2) We cancel our deal, because the government terms are unacceptable to one or both of us.  3) We evade the law, creating a black market.  Note that government has done absolutely nothing to encourage trade, but only served to detract from the potential gains.

This is a simple scenario, but its essential truth remains valid across similarly simple and very complex scenarios played out for all 300 million Americans.  Price controls, taxes, and regulation necessarily curtail trade.

A government that insists on artificially raising or lowering prices creates a relative paucity of trade compared to one that refuses, out of good sense, to interfere.  Government intervention designed specifically to set prices during a depression – e.g. lowering interest rates, raising home prices and nominal wages, or say, attempting to “contain” the costs of medical care – is actually accomplishing the exact opposite of “rescuing” the economy.  Imagine a lifeguard, who having just rescued a drowning swimmer, decides that the man coughing up water on the sandy shore needs a drink, opens his mouth, and commences a second deluge.

Furthermore, by bailing out State governments, the administration has only delayed the necessary contractions that must be realized with state budgets, resulting in what will likely be sporadic bankruptcies in State capitals around the country.

Taking cues from the policy playbooks of Hoover and FDR is one way to trigger a Second Great Depression.

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