The U.S. Bureau of Labor Statistics released its June 2011 jobs report last week. It found that America added only 18,000 jobs in the month of June – far less than expected. The Unemployment rate remained flat, at 9.2%. In order to even maintain that rate, America needs to create – at minimum – 150,000 jobs a month. 18,000 jobs a month won’t cut it.
The problem with these numbers is that they’re not the whole story. In actuality, the private sector created 57,000 jobs. Nowhere near what we need, but three times more than what we ended up with. The 39,000 jobs that disappeared: Local Government Layoffs. As the last funds from the stimulus package dried up, local and state governments had to start laying people off. Also, deep cuts in local government spending by new Republican majorities in state legislators will likely continue this trend. Add to that the planned historically huge cuts at the federal level if President Obama and the Republican leadership can make a deal on the debt ceiling, the unemployment rate will likely end up topping 10% by the end of the year.
The Private Sector is creating jobs, not enough, but jobs are there. The problem is the government is shrinking, which in turn increases the unemployment rate and decreases economic activity. The government spends money on lots of things, but the biggest expenditure is people. And, those people get a paycheck. That paycheck pays for food, housing, clothing, bills, etc. It is estimated that local, state, and federal spending cuts could eliminate over 1,000,000 jobs over the next 2 years.
The philosophy of Republicans about the government being too large and hurting the economy has some merit, but they fail to acknowledge, and the Democrats fail to explain, that Government has to participate in the free market system in order for itself to function, as well as to spur economic growth.
Look at something as simple as office supplies. Office Supplies are a 50 Billion dollar industry. Legal pads, paper, pens, paperclips, staplers, ink cartridges, etc; they all are physical products and a lot of it is made in the U.S. 3M’s iconic Post-It Notes, one of the most popular office products, owes nearly 15% of its sales to the U.S. Government. Now, imagine if the U.S. Government suddenly stopped buying Post-It Notes. How would a 15% drop in sales affect 3M’s bottom line? When sales go down, private industry downsizes and people are laid off, further aggravating the unemployment numbers and decreasing economic activity.
Republican Presidential candidate Tim Pawlenty talks about a “Google Test” for government. If a Google search turns up a private company that is providing a service that the Government provides, he would eliminate that government service. It sounds good, in theory, but historically, handing over government programs to the private sector hasn’t saved us money in the long term. The thinking goes – if the government stops providing a service, this creates a window for private enterprise to enter and a whole slew of new customers to woo. This creates competition and lower prices for consumers.
In practice, this hasn’t worked well anywhere a Government has turned over a service to the private sector. Russia’s relinquishing telecom services to the private sector resulted in decreased competition and some of the highest rates anywhere in the industrialized world. Japan’s partial-privatization of its railroads ended up leading to more accidents, higher costs, and less dependable service.
In the United States, generally, the government provides specific services that cannot be easily duplicated in the private sector. President Obama’s plan to turn over space travel to the private sector may not work as well as it needs to, considering the safety concerns over getting people into space. The Federal Government has the money and resources to accept that risk – the private sector will not be as lucky.
One of the reasons Richard Branson’s Virgin Galactic Space plane rides have been priced as high as they are ($250,000 per person for a 6 minute junket into low Earth Orbit) has to do with liability insurance. Going to space is dangerous, and getting an underwriter to protect a company in the event of disaster is going to be expensive. The idea that volume will lower costs is true – but getting to that critical mass of customers will be massively expensive – significantly more than we’re paying right now.
The Government is a big player in our economy. It needs to spend in order for the private sector to function. If the debt ceiling isn’t raised and the Government is forced to stop spending money, this will seriously harm the economy. However, massive spending cuts incurred right now, during economic stability, will also be bad. Treasury Secretary Geithner estimated that the federal government would have to immediately cut over $160 Billion in spending on August 3rd if the debt ceiling isn’t raised. That would lower overall GDP to negative territory and put us back in recession. If the Government voluntarily cuts $300 Billion this year with an additional $4 Trillion over the next 10 years, we will also slide back into recession.
Deficit spending is a problem; there is no doubt about that. However, our economic situation is still very fragile, and reduced economic activity on anyone’s part will make things worse. Since the economy is growing at a paltry 2.1% and considering that Government Spending makes up nearly 15% of our total economic activity, cutting Federal spending even a little could put us back in recession, and exacerbate the unemployment issue even more.
I believe we need to wait until the economy is stronger before we scale back government spending. Yes, there is wasteful government spending out there and it needs to be addressed. There are also important, underfunded programs out there that we need to improve. Right now, our economy is shaky. Until we can afford to scale back, the debt will have to stay.
I appreciate hearing a rational discussion addressing the need of spending in order to keep our economy afloat. If everyone keeps all of their cash held tightly in their fists instead of spending it, businesses no longer make as much, meaning employees no longer have jobs, leading to fewer people have less money to potentially spend. I tried making that point to someone not long ago, and was then presented with a diatribe about how idiotic it is to even entertain spending any money at all when the economy is hurting.
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