A Deficit-Neutral Plan to Slash Unemployment

While the U.S. economy has been officially out of recession for a while and growing at a decent clip (1.8% at a seasonally adjusted annual rate in the first quarter of this year, 3.1% in the last quarter of 2010 – see chart), unemployment remains very unusually high, 9.0% in April 2011 (seasonally adjusted), compared to just 4.5% five years ago. The Economist wonders whether the U.S. has caught the European disease of “structural unemployment.” What can be done to get unemployment down fast?

Click “Continue Reading” to view the Sorens Deficit-Neutral Plan to Slash Unemployment (SDNPSU – catchy acronym, right? Try pronouncing it like “sudden Sue”):

• Abolish the corporate income tax and end all energy, commerce, and agriculture subsidies (deficit impact: -$81.3 billion)
• Abolishing the corporate income tax provides a massive, immediate incentive for business investment. Currently, the U.S. tax code promotes outsourcing (I’m a fan of outsourcing if it’s productivity-driven, but not if it’s driven by legal distortions) and effectively double-taxes business income (since capital gains and dividends are also taxed), discouraging investment. As business investment increases, worker productivity rises due to labor-capital complementarity, increasing the equilibrium wage in labor markets and the number of workers employers are willing to hire. Abolishing subsidies ends distortions in the domestic economy, allowing capital to flow to its most productive and therefore profitable uses.
• Abolish the federal minimum wage (deficit impact: positive but unknown)
• As a form of price floor, the minimum wage creates a surplus (i.e., unemployment). The adverse effects are particularly severe for blacks and young people.
• Repeal the National Labor Relations Act, Davis-Bacon Act, and Taft-Hartley Act (deficit impact: +$9.3 billion)
• The NLRA was a bad idea on grounds of both efficiency and justice. It allows labor unions to cartelize workplaces by legally mandating that employers recognize collective bargaining units whenever a majority of workers vote to be recognized by a union. The sole purpose of this cartelization is to create monopoly power on the part of the workers, driving wages above the equilibrium level, which creates unemployment. The Davis-Bacon Act requires the federal government to pay its contractors well above market rates. The Taft-Hartley Act, which authorized state right-to-work laws, becomes unnecessary once the NLRA is repealed.
• Abolish unemployment insurance and the unemployment insurance tax (deficit impact: +$92.3 billion)
• It is indisputable that unemployment insurance prolongs unemployment, as recipients tend to hold out for their ideal job until benefits run out. During the initial phase of the recession, abolishing unemployment insurance would perhaps have been cruel – at least, it should not have been a priority. At this point, however, it does more harm than good. Instead of unemployment insurance, why not allow workers to keep more of their own money and put away savings for the rainy days?

TOTAL DEFICIT IMPACT: +$11 billion

My deficit impact calculations are of course back-of-the-envelope estimates (based on figures at usgovernmentspending.com, usgovernmentrevenue.com, and downsizinggovernment.org), but I think I have actually been very conservative, as I have not modeled the impacts of these policy changes on the economy. If the reforms work as intended, and more workers do indeed become employed and start paying payroll and income taxes, then the deficit impact will be even more positive.

Now what are the chances that any politician will dare propose anything like this?

UPDATE: The “+” sign means that the reform improves the budget balance (reduces the deficit), while the “-” means the opposite.

UPDATE 2: Added a link to research on the unemployment insurance-unemployment link.