Thursday, October 13, 2011

It ain't looking good...

When the history of our time is written twenty or so years from now, I believe that it will be recorded as a depression, not merely a recession with a weak recovery. My reasoning for this relates to one of the harshest aspects of the Great Depression of the thirties. Back then, the amount of money in circulation plummetted to such a great degree that prices had to collapse in response. A loaf of bread and a quart of milk could be had for fifteen cents, at the worst of those times. What struck me today about this sort of deflation is why its opposite, rapidly rising prices-inflation, is not occurring. The major world powers, not just the U.S. mind you, have been rapidly increasing the world's money supply through a variety of financial "bail-out" methods. It should follow then that a large increase in the money supply should cause high or hyper inflation. And yet, it isn't happening. Yes prices have risen a bit here and there, perhaps 5% or so. That doesn't make any sense to me unless something else is operating to drive prices down. And this is why I'm thinking Depression. It seems likely to me that the reason that a huge increase in the money supply hasn't triggered run-away inflation is that it is being balanced by a large increase in deflationary pressure at the same time. The two forces are largely operating in a state of equilibrium. This is not a recipe for long term recovery, much less stability. We can't keep injecting money into the economy forever.

To pull out of this, we need to do something that quickly re-establishes confidence in the economy as a whole. I would suggest two simultaneous approaches.

First of all, instead of berating businesses, work with them. Pull the leadership of the Fortune 500 into a closed door meeting and pointedly tell them that you want them to hire 5 million people. Then throw it back to them by asking what they want from the government to make that happen. Some might want tax abatements, others exemption from regulation, others trade protection, whatever. Make the deal and make it happen and hold them to the hiring goal.

Secondly, stop the bleeding. Create a new system to address the consequences of layoffs. Empower the Department of Labor in the following fashion. Any employer contemplating an economic based layoff (disciplinary layoffs are, obviously, something entirely different) should have to confidentially inform the Department before any action is taken. Upon receipt of this notice, the Labor Department would have the power to pay the employer the value of the would-be laid off employees unemployment benefits. In return, the employer would only be able to reduce the employment hours of the affected workers to the break-even point. The layoff thus does not happen. To be sure, the employee is adversely effected. But these employees will still remain employees who have to get out of bed in the morning, put gas in their cars or get on the subway. They will not have to tell their families that they are unemployed. They will not have to tell a prospective new employer that they became unemployed. And, the cost to the treasury should be the same as it would have been had traditional unemployment benefits been paid out.

This isn't a perfect proposal. There is potential for abuses by many different parties. That being said, abuses can be prevented and dealt with by appropriate enforcement mechanisms. I increasingly believe that unless we change course economically though, our future is very bleak indeed.


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