The House Republican Policy Committee invited top economists to its Summit on the Economy and Unemployment on September 30th to address the question on so many Americans minds: What went wrong with the economy?
Representative Mike Pence (R-IN), House Republican Conference Chairman and co-sponsor of the summit with Rep. Thaddeus McCotter (R-MI), addressed the disconnect between “the priorities here in D.C. and the priorities of the American people,” such as the gulf between what politicians say about the stimulus bill and its actual performance.
“Apart from our national defense,” stated Pence, “there is no higher priority today for the American people…than to get this economy moving.” (An October Rasmussen poll now shows that “83% now view government ethics and corruption as very important, placing it just ahead of the economy on a list of 10 key electoral issues regularly tracked by Rasmussen Reports.”)
The U.S. Secretary of Labor, Hilda L. Solis, said on October 2nd in her statement on the September 2009 Employment Situation report that “This past September the economy lost 263,000 jobs.”
Mallory Factor, President of Mallory Factor Inc, a merchant bank and financial relations consultancy, outlined the economic failings of the government, saying that the U.S. “economy has lost seven million jobs [in this recession],” bringing unemployment up to 15 million people. The “stimulus promised to create or save at least 3.5 million jobs but America has actually lost 2.4 million since the bill became law,” said Factor, adding that the current ratio of job seekers to job openings is six to one.
David Malpas, top economist and President of Encima Global, blamed the recession, in large part, on bad fiscal and monetary policy choices.
First, he blamed a series of Federal Reserve System (Fed) “mistakes on interest rates,” such as “measured hikes from a one percent interest rate during a global boom.” Second, he said that Washington has had a weak dollar policy that has “pushed capital abroad and lowered U.S. living standards” such that “incomes cannot keep up with oil prices.” He said that “the dollar is weak, causing low living standards.” He also criticized “the heavy tax-and-spend bias dominating Congress,” which, he argued, leaves Americans “facing the biggest tax increase in history.”
Malpas, along with Luigi Zingales, thinks that another main reason for the recession is the government’s policies towards small businesses. Small businesses, said Malpas, “are being systematically cut off from financing by Washington policies.” Washington has gone from ignoring banks to micro-managing them, he argued. Luigi Zingales added that small banks are subject to the market discipline and so the government should be cautious with regulation, making sure that regulation differentiates between big banks and small banks.
Malpas optimistically claimed that “these problems are fixable.” The government, he said, chooses these poor policies, by “expanding itself rather than the economy.” Washington maintains jobs “even while the rest of the country is down four percent,” he objected.
What should be done to try to fix the economy? Malpas gave three major points of advice:
- the Fed should stop its excessive spending,
- it should “strengthen the dollar and then let it be stable for a change,” and
- the government should change regulatory policies so that small businesses have a chance at getting financing.
Dr. Arthur Laffer, Chairman of Laffer Associates, an economic research and consulting firm, is a relative expert on macro-economics and he, too, blamed much of the recession on U.S. fiscal and monetary policy mistakes.
At the summit, Laffer outlined what he thinks would be the idyllic U.S. macro-economic policy, which would entail
- a low-rate flat-tax,
- spending restraint,
- a stable dollar,
- free trade, and
- minimal regulations of businesses.
The purpose of monetary policy, argued top economist Laffer, is to guarantee the value of purchasing power of the monetary unit; this requires a stable dollar so that people are willing to make long-term contracts, said Laffer, calling the Fed’s recent policies “the antithesis of careful, steady, good, solid moves.”
“Free trade is the rule that makes for prosperity,” claimed Laffer, adding that the idyllic trade policy would have the minimum amount of impediments to the free flow of people and products across boundaries. The Obama Administration is not doing that, he argued, pointing out restrictions on Chinese tires, stoppage of trucks coming in from Mexico, and the Democratic Congress opposition to the Colombian Free Trade Agreement.
Zingales, Professor of Entrepreneurship and Finance at the University of Chicago at Booth School of Business, studies the economic theory behind the firm. He attributed the financial crisis to “a failure of regulation-bad regulation,” not a failure of markets.
He described an important difference between what he calls “pro-market” and “pro-business” economic mindsets. A pro-market mindset desires free entry and competition. A person with a pro-business mindset does not want either of these because it means competition against their interests. It is the pro-business people, he said, that are lobbying the government.
More government involvement in the economy, warned Zingales, would mean that some businesses are more likely to succeed not because they have the best business strategy but because they are the best politicians.
Diana Furchtgott-Roth, Director of the Center for Employment Policy at the Hudson Institute, focused her talk on labor issues. Despite what she called the government’s “rhetoric of job creation,” she said bills like cap and trade and health reform are likely to increase unemployment, not decrease it. Furchtgott-Roth also disagreed with House Speaker Nancy Pelosi’s claim that the American Clean Energy and Security Act is about “jobs, jobs, jobs.” The cap-and-trade bill would raise energy prices and reduce greenhouse gas emission levels to what they were in about 1890, said Furchtgott-Roth, predicting a “substantial cost to producers which would then be passed to consumers.”
The summit’s purpose was, according to its hosts, to talk about jobs. Even President Barack Obama conceded that the unemployment rate will rise above 10%, reported Bloomberg.com back on June 17th. The Labor Department’s recent Employment Situation report showed that unemployment increased to 9.8% in September, up from 9.7% in August. Unfortunately for President Obama, he will likely see his prediction fulfilled quite soon.