Guideposts Towards Economic Recovery

Originally publised in the CA and NV Examiner for the 11/26/2010 issue    

     I have written several articles in this column in the past, “ Obamanomics vs. Reaganomics,” “ Stimulus and Tax Cuts: Who Are We Kidding,” wherein I shared the views of the critics of this Administration regarding the failure of several Administration’s programs, such as the Cash for Clunkers, First Time Homebuyer’s Credit, Massive Stimulus Spending and Monetary Easing. (You may want to check out my Blog, http:artjaviertax.blogspot.com, if you missed these articles or if you want to check them out and read them again the second time).

      What seems to be perplexing is that in spite of these failures, the present Administration still holds on to the book of Keynes. Recently, the Fed announced to pump $600 billion of money supply to stimulate the economy- again embracing the Keynesian demand side economics. The Administration officials should probably take a  hard look to determine if their line of approach has not been effective to bring this country towards growth and economic recovery.

     A noted economist, Arthur Laffer, is saying that, "the solution to our economic problem can be found in the Price Theory which can be found in the most basic Economics textbook." It’s basic supply and demand, which we have learned in Economics 101. Let’s take the issue of Unemployment. Laffer argues that employment is low because the incentives for workers to work are too small and the incentives not to work are too high. Workers compare the wages or benefits they will get if they work vis-a-vis the unemployment benefits if they don't (they add the leisure value of not working). They conclude that they are better off not working and would rather enjoy the 99 weeks of unemployment benefits.

     With the workers’ wages really down, the supply of labor is therefore limited. Meanwhile the demand for labor is also down since when employers consider the costs of employing new workers-wages, health care, and more-they are greater today than the benefits.

     The Agenda.  But we need more specifics here, as in, "what agenda can we propose to the present Administration to bring us and propel us towards achieving economic recovery?" I share the views of Laffer and this is the agenda he proposes:

(1)   The full extension of the Bush tax cuts. The Republican controlled House of Congress will push this and the Senate may block it or President Obama can veto the House bill. Our unemployment problem can be worsened if we let the Bush tax cuts expire. Personal income tax rate should stay at the top rate of 35%, capital gains tax rate at 15%, dividend tax rate at 15% and pursue the permanent elimination of the estate tax.

(2)   The full repeal of the ObamaCare, which allows the individual to pay only five cents for each dollar of health care. Who do you think pays the other 95 cents? The former Senator Phil Gramm notes, if he had to pay only 5 cents for each dollar of groceries he buys, then he would really eat very well-and so would his dog. Many critics note that no single bill is more antithetical or an antithesis to growth and economic recovery than the ObamaCare.

(3)    The cancellation of all spending that punishes those who produce and rewards those who do not. Laffer argues that “this is really the distinction between the demand side economics and the supply side economics.”  Stimulus spending and quantitative easing don’t make it more rewarding to work an extra hour. If the government pays people not to work and taxes people who do work, is it really so difficult to understand why employment is too low? Talk about the Las Vegas or Nevada unemployment rate of 15%!