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Faster economic growth is the only one way to enjoy a permanent and sustained improvement in employment.
The annual Economic Freedom of the World report is a roadmap showing where nations are doing well and where they are doing poorly. Compiled by the Fraser Institute, the report considers 42 different measures that form the basis of five major variables (size of government, legal structure/property rights, sound money, trade, and regulation).
In the United States, the lowest-ranked variable is the size of government, and the U.S. gets particularly low scores for government consumption, followed by transfers and subsidies. In other words, the federal government is too big and it is spending too much money. This suggests that reductions in the burden of federal spending would be a very sound first step. Lower levels of federal spending will free up resources for the productive sector of the economy and allow labor and capital to be used for purposes that add to prosperity.
But reducing a bloated federal budget is just a first step. Looking at the 42 different measures in the EFW report, the United States gets dinged with failing grades in other major categories, including impartial courts, regulation of private sector credit, and cost of bureaucracy.
While the United States doesn’t get a failing grade for its tax system, I can’t resist also adding that the corrupt internal revenue code should be replaced by a simple and fair flat tax. Eliminating loopholes and instituting one low rate would dramatically improve incentives for work, saving, and investment, while also wiping out distortions that lead people to deliberately misallocate resources.
Dan Mitchell is a senior fellow at the Cato Institute.
Repair Our Balance Sheets
Vernon L. Smith
The one concrete policy that would address the problem of job growth is to address the joint negative equity problem of the households and banks.
This means that the large banks have to go through de facto bankruptcy and reevaluate their mortgages (and other loans) in line with current mark-to-market home values, thus simultaneously repairing the damaged balance sheets of households. This happened under Sheila Bair’s FDIC, where she presided over the restructuring of 360 smaller banks in the last three years.
The same was needed in the Depression, the main difference being that this time around the Fed acted, in 2008–2009, to temporarily address bank insolvency. But there was no follow-through to repair bank-household balance sheets.
So we are stuck with banks not lending and households not spending. Tax reductions, subsidies to business for hiring, and so on do not reach the root of our economic distress.
Vernon L. Smith is a professor of economics at Chapman University and the 2002 Nobel laureate in economics.