Our Economic Security Depends on Job Creation

Thursday, 07 Nov 2013 07:30 AM

By Neal Asbury

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The impact of 26 million Americans who are unemployed or underemployed moves this nation further and further away from economic security. Then add in the millions of American who have been forced into part-time jobs (who are five times more likely to live in poverty) and we have an economic picture that would make our Founding Fathers weep.

An underlying issue that receives little coverage is that when people don't have jobs or economic security, they don't make the long-term investments, which are the bedrock of our economy. There are fewer dollars that can be loaned to small business — our job creators — so the nation is caught in a downward spiral.

Lance Roberts from SDT Wealth Management, appearing on the radio show Made in America, noted that the United States is caught in a liquidity trap, which is:

"a situation described in Keynesian economics in which injections of cash into the private banking system by a central bank fail to lower interest rates and hence fail to stimulate economic growth. A liquidity trap is caused when people hoard cash because they expect an adverse event such as deflation, insufficient aggregate demand or war. Signature characteristics of a liquidity trap are short-term interest rates that are near zero and fluctuations in the monetary base that fail to translate into fluctuations in the general price levels."

In other words, when people aren't working, banks aren't lending, people aren't investing or spending and the economy is flat.

Writing for Forbes last year, author Mike Patton suggested:

"When you include all calendar quarters from January 1948 through the end of the second quarter 2012, the average unemployment rate during quarters when GDP was negative (i.e, the economy contracted) was 7.4 percent. The average rate during the entire period was 5.8 percent. When you exclude all quarters with negative GDP, the average unemployment rate was 5.6 percent. Therefore, it is easy to conclude that until we can get unemployment down to say less than 6 percent, GDP will likely remain sluggish."

Many economists base their calculations on Okun's Law, which, boiled down, proposes that there is a direct correlation between jobs and growth. One version of Okun's Law has stated very simply that when unemployment falls by 1 percent, gross national product rises by 3 percent. Another version of Okun's Law focuses on a relationship between unemployment and GDP, whereby a percentage increase in unemployment causes a 2 percent fall in GDP.

So based on our current trajectory, if we maintain an unemployment rate of 16 percent (our real unemployment rate that includes those who have given up looking for a job) and it's not hard to see why our GDP is stuck at or below 2 percent. This is an unsustainable percentage if we are to move our economy forward and create the jobs that are so desperately needed.

The International Monetary Fund has a succinct explanation of why this country isn't moving ahead economically:

"Unemployment does not fall in lockstep with an increase in growth. It is more common for businesses to first try to recover from a downturn by having the same number of employees do more work or turn out more products — that is, to increase their productivity. Only as the recovery takes hold are businesses likely to add workers. As a consequence, unemployment may start to come down only well after an economic recovery begins."

Do you think anyone in the Obama administration has read something like this? This surely sends a message that most businesses do not think that the recovery has taken hold. They are sitting on the sidelines because they have no faith in the current economy.

So the administration engages in a magic trick. "Nothing up my sleeve when it comes to jobs, but look over here — the stock market is doing great. That must mean that the economy is recovering. Ta da!"

It would be a great trick, if the truth wasn't that only 5 percent of Americans have any money invested in the stock market. So when the stock market rises, only the brokers make any money, not the 76 percent of Americans who live paycheck to paycheck.

This country cannot and will not grow economically unless we start creating good-paying, private sector jobs.

Do we need another magic trick to accomplish this?

No. We need to reduce taxes and regulations that keep small businesses from growing and hiring. We need to ensure our community banks are healthy so they can lend money to our small business, entrepreneurs and inventors. And we need to expand our global trade by lowering the multitude of barriers being erected against our manufacturers. No trick. Just common sense. Our economy cannot be sustained at our current unemployment figures.

To put it in perspective, as Patton wrote in Forbes: "Employment is to economic growth what oxygen is to the human existence. You can't have one without the other."

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