Sunday, October 30, 2011

Back to Basics

The number one problem for the US and for Western Europe is job creation. There is no bigger problem. The politicians can focus on all sorts of other things: taxing rich people, subsidizing pet projects, bashing China, etc. But, anyone who thinks there is a bigger problem than unemployment is missing the forest for the trees.

How do we get more jobs? That is not a tough question. It is only tough because we are talking about labor. If we asked the identical question about anything else, the answer would be painfully obvious. For some reason, politicians and many economists become completely irrational when asked how to increase the demand for labor. If the same politicians and economists were asked about how to increase the demand for anything else the answer would be immediately forthcoming.

How do you increase the demand for something?

How about making that something more expensive? Would that help?

What about substantially increasing the taxes for people that use that something? Would that help?

What about passing new regulations that would apply to using that something? Would that help?

To increase the demand for apples, why not make apples more expensive, tax folks who eat apples, and make anyone who buys apples spend one month of every year filling out paperwork to satisfy the regulations required to consume apples. Would that increase the demand for apples?

Yet, politicians and economists (like Paul Krugman) think that this is exactly the prescription necessary to get to full employment of labor. They are wrong.

To get more jobs, you need to reduce the cost of labor, increase the economic incentives for those who employ labor and reduce the regulations that surround the employment of labor. That's how you would increase the demand for anything including labor.

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