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)
  • 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 The Taft-Hartley Act, which authorized state right-to-work laws, becomes unnecessary once the NLRA is repealed.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.

6 thoughts on “A Deficit-Neutral Plan to Slash Unemployment

  1. Well, one thing’s a given: this will never happen. I can see it now.

    “Abolish the corporate income tax and end all energy, commerce, and agriculture subsidies” will yield cries of “You’re not making big business pay its fair share. Ending energy subsidies will leave granny in the dark, without air conditioning (or heat, depending on the season). You hate the farmers who are basis for our existence!”

    “Abolish the federal minimum wage” will mean “a direct attack on America’s working poor. An attempt to impoverish the workers who make the corporate fat cats’ lives of supreme leisure possible.”
    “Abolish unemployment insurance and the unemployment insurance tax” will produce similar shrills.

    Abolishing the labor boards will mean “exploiting the people and ruining their children’s future.”

    Of course, after accusing you of all this, the opposition will demand you present more serious proposals so that a civil debate can be had.

    I’m not too cynical regarding American politics am I?

    1. I think you’ve got the tone just right! You could probably also throw a reference to “plutocracy” in there somewhere.

  2. “It is indisputable that unemployment insurance prolongs unemployment, as recipients tend to hold out for their ideal job until benefits run out. ”

    INDISPUTABLE huh?

    My unemployment ran out SIX months ago. Did that make employers any more eager to hire me? NO!

    Holding Out? I don’t ‘freakin think so! When they don’t want to hire you (because of your age, or overqualified status, race, or WHATever other reason they imagine) guess what, THEY WON’T HIRE YOU. Right now, it does not matter WHERE you apply. There still are NO JOBS, and I doubt that there ever will be again.

    1. I’m sorry about your problems finding a job – that is a really tough experience for anyone.

      Abolishing unemployment insurance won’t necessarily make employers more willing to hire, but it will make employees more willing to accept jobs that are available. The other measures in my plan are intended to address employers’ incentives.

      There’s a good bit of research out there showing that people on unemployment insurance become more willing to accept jobs as their benefits come to an end. Here’s one example:
      http://www.nber.org/papers/w2546

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