Jobs, Taxes and Benefits

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What triggered the recession?
What is the tax money for? Will it last?
What, if anything, should governments do?
Government policy - who wins and who loses?
The personal side.

Why is there so much concern now? Because the quick downturn in jobs in 2001 followed an eight year job growth that was greater than ever in our entire history. The shock value from 3.9% unemployment (primarily people who cannot work) to a projected 6.2% or more this year even worries people with high-paid jobs.

Manufacturers began to lay off workers in 2000 because they had excess inventory. By spring of 2001, the dot.com internet companies which had hired high tech people, using money not from sales but from investors who bought their stock, lost their support and their stock prices fell before they ever paid a dividend. 400,000 nonfarm jobs were lost by March when the U.S. entered a recession.

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During the economic good times of the last 8 years, we were excited that we had more tax money in the Treasury than we needed, some $304 billion dollars. And if we set aside the money that came in for health care for the elderly (Medicare) and the money that came from payroll taxes for retirement (Social Security), we still had $93 billion to use to plan for the future of us all.

Then times changed and policies in Washington changed.

Part of our concern is the projection that soon Americans will need more health care (through taxes for Medicare) because we are living longer and there are new medicines and technologies that we will want to make old age more livable.

Part of our concern is that as we live longer, the payroll taxes that we pay into the national pool (the Social Security Trust Fund) will not be enough for the retirement guarantee to all the baby boomers (now in their fifties) when they reach 65.

The shift in expectations from high hopes and risk-taking investments to lost jobs and fear for the future caused employers and employees to worry.

Then came September 11. In the first two months after the attacks, another 800,000 jobs were lost in airlines, travel, hotels, and retail stores. Some economists predict that the downsizing of jobs will continue, even into a recovery, as businesses cut back to protect their profits and their shareholders stock value. Over a million people lost health insurance since March 2001. And it continues.

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Knowing that business cycles and recessions happen and that ultimately the economy rebuilds, the question is: should government do something to protect its citizens from job loss?

The United States is now in the tenth recession since the end of World War II. We have recovered from the first nine and will, given time, recover from this one. However, if the time is very long, many people suffer. In every recession there is serious debate about what caused it to happen and what should government do about it?

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The debate relating to this one began with the Reagan administration which borrowed a great deal of money to pay for a military buildup against the Soviet Union. When government borrows, it competes for investors' capital against the private sector, so interest rates on all loans go up. This is good for lenders; they get a greater return on their loans. However, for businesses that need to borrow in order to grow, the cost of capital is expensive. When capital is expensive, new businesses cannot afford to borrow and fewer new jobs are created.

When the Soviets collapsed in 1989, some believed we had caused them to spend themselves into bankruptcy to match our military strength. Others thought that we need not have spent so much because the Soviet system was crumbling on its own. In either case, we were left with a large public debt and yearly payments of interest on those loans.

What is government's role in these business cycles? What difference does it make if government spends more, borrows more, taxes more? What should government do to alleviate the pain of those hurt by layoffs? Should government create jobs by building up the military? Should government create jobs by building and repairing roads, bridges, airports, railroads -- all known as "infrastructure"?

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We all know that in a capitalist private sector economy, we should expect businesses to expand until they overexpand or are overtaken by new inventions or new services.

We should expect that after a period of expansion, there will be a downturn and that businesses will cut costs by laying off employees and closing facilities. Very few businesses last into second and third generations.

Competition creates new businesses and people who work for the old ones regularly lose their jobs. To quote one senior executive, "It is a pendulum. When times are good, the strategic planners are in charge. When business falls off, the finance people take over, cut the budget, and lay off employees." Employees have to learn new skills and go to work for the new businesses, often in a new location.

We know we should save our money when times are good and take time to study and train in new technologies before the old ones give out. But Americans have the lowest savings rate of any industrialized modern country, and American consumers fuel the engine of economies of many other countries by buying their exported goods and services, including gas for our SUV's and pickup trucks. Americans regularly borrow using their credit cards, often paying 18% and more interest on those easy to get loans, just to keep on buying the goods and services that give us our remarkable standard of living.

Many people are borrowing from banks and credit unions on the value of their homes. These home equity loans tide people over until they get new jobs. The low interest rates triggered by the Federal Reserve make all rates go down, including mortgages, so that homeowners can refinance their mortgage payments at lower rates. 65% of these people borrowed more than they owed and are paying interest in order to replace income from lost jobs.

Those whose savings are in tax-deferred accounts partly matched by their employers (401k plans) are hurt if their savings are in company stock whose price has dropped in the last year. 95% of companies now have flexible pay, with good years rewarded by bonuses and bad years, like the recent one, without them.

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