Saturday, June 13, 2009

Clarity on Unemployment and Wealth

It has been quite a while since I have published on "See The Forest" and I regret that. The hiatus has not stopped me in my quest for clarity, however.

The other day while in deep thought about the predicament in which our country finds itself, I had one of those rare moments of clarity. My revelation: unemployment results from a loss of wealth. Conversely, a sustainable rise in employment can only be brought about by an increase in wealth.

The reasons for this are many and undeniable. The vast majority of jobs in the United States are created by entrepreneurs and small businesses. Small businesses have more limited access to credit relative to large businesses and thus are more dependent upon cash flow to finance ongoing operations and growth. Is is this growth that leads to gains in overall employment. During economic downturns or when taxes are raised, cash flows drop, forestalling growth and leading to decreases in employment.

Socialist/liberal political and economic theory denies this very simple principle that employment and wealth are related. As adherents to Keynesian economic theory, in economic downturns Democrats seek to combat unemployment through increased government hiring and government spending. Increased government spending, however, crowds out private sector investment, and requires higher taxes that reduce the very cash flows that are required to drive private sector employment.

The inevitable result of denying the principle that wealth and employment are linked is the failure of government policy.

How does all this relate to situation in which America finds itself now? Well, I believe that the Obama Adminstration's efforts to boost the economy by instituting massive government spending in the form of the stimulus program ($800 billion), combined with the enormous increase in spending required (to the tune of over $1.5 trillion) to enact health care legislation, will require massive tax increases, while at the same time increasing interest rates, destroying wealth and leading to high structural unemployment. Many of the President's economist say that the spending is necessary and will create jobs. Well, all one needs to do is witness the relative economic stagnation and high unemployment across Western Europe since these same economic policies were instituted in the last thirty years.

I venture to bet that, given a real choice between the growth in prosperity that America has seen over the last three decades compared to the way Europe has withered, America would once again choose prosperity, i.e., lower taxes and lower government spending. Let's hope we get that choice before it is too late.