Saturday, October 29, 2011

The Benefits of High Unemployment

With the official unemployment rate persistently hovering above 9% and new applications for unemployment compensation exceeding 400,000 weekly many pundits and politicians lament this scenario and offer dire warnings. However, I do not believe that a high unemployment rate is a precursor to the doom and gloom prognostications that spill forth from the lesser enlightened.

My compendium of the benefits of high unemployment will focus on four main areas: government, business, economy and society.

Much of the panic in financial markets that opened the month of October was speculation that one of the world's most socialist governments, Greece, may default on it's loan obligations. Greece is currently being funded by other European Union countries and the International Monetary Fund so that it can cover it's pension and welfare payments. But, the funding is conditional. Greece has been forced to agree to austerity measures; financial reforms that reduce government spending in an effort to achieve a budget surplus so that the loans can be repaid.

The United States has been operating in much the same manner as its more extreme socialist counterparts. Standard & Poors recently downgraded the debt rating of the United states Government based upon a high ratio of debt to production, known as the Gross Domestic Product or GDP. Since the US Government obtains most of its revenue from personal income taxes and embedded taxes paid by consumers, a high unemployment rate will reduce government revenue.

To maintain its high rating and to continue to ensure that nations such as China continue to buy our bonds and fund our deficit spending the US Government will eventually need to cut spending. As the riots in Greece demonstrate the populace is not in favour of cuts that directly withdraw welfare payments from the citizenry.

Some of those cuts are exactly what we need such as raising the retirement age for Social Security benefits to 85. Common sense approaches such as that are very unlikely from a Congress that is having difficulty in facing statutory debt limits on a regular basis. Although recent deficit spending produced a 2.5% growth rate in GDP the next danger to financial markets will be a potential US downgrade based upon lack of Congressional action.

We do have the benefit of grass roots activists such as the Tea Party bringing forth the reality of government waste and invasive programs that should be slashed or eliminated. The first that comes to mind is the Department of Education. Nowhere in the US Constitution is education founded upon the federal government. In fact, it is constitutionally specifically reserved as a state issue.

The avarice of "educators" has been a significant burden on taxpayers as has the entire educational superstructure. It is no secret that I am a longtime iconoclast of that educational superstructure and will go into the crippling effects of that later.

Areas where the federal government has been intrusive into our individual rights and the purview of the many states should be the first to go in an effort to sustain a balanced budget. Projected long-term unemployment will help the Congressional Budget Office make realistic revenue expectations and help Congress make these necessary cuts.

Traditionally, economic contraction has been seen as a bad thing. The logic was that reduced economic activity leads to layoffs which leads to fewer people having money to spend which leads to further economic weakness and thus lower corporate earnings. In the past few years we have been operating under a new corporate paradigm.

Consistently high unemployment is a good thing for business. Recently I saw where a company had approximately 100 job openings and received 25,000 applications. This allows that company to select new employees from within the top 1% of applicants. This will surely lead to increased employee productivity as the company needs only to hire the best possible employees. Not only will the new employees be more productive but the current employees are put on notice that there are 24,900 people waiting in line to replace them if their productivity is insufficient.

As corporations facilitate the use of technology and outside suppliers they become less subject to the bane of their need for employees. Machines do not demand outrageous benefits or sue them for every perceived intrusion upon "their rights". As an entrepreneur 20 years ago I submitted a declaration to the Indiana Department of Revenue that I would never have an employee. Through the use of technology and the occasional use of independent contractors I have managed to avoid the suffocating stranglehold of having an employee. Corporate America has recently come to the same conclusion.

A corporation that experiences a sales reduction requires less manufacturing, distribution or office space as their specific operational needs may require. Just as with employees this allows the corporations to choose to maintain only those lease agreements that provide the greatest return thereby again increasing corporate profits.

Additionally, the reduced demand for manufacturing, distribution or office space allows the corporations to demand lower lease payments and thus they do not finance the former opulent lifestyles of the land corporation executives. The supply and demand equation is now working in favour of the corporations much to the chagrin of the formally trained economists who do not comprehend this new paradigm.

Proof of the benefits to corporations of high unemployment are already appearing in government measures of payroll and employment costs. While overall productivity is increasing as less productive workers are dismissed the rate of increase in the cost of wages and benefits is decreasing. Benefits, which account for about 30% of employee cost, saw the greatest reduction.

The reduction in GDP, particularly two consecutive quarters of contraction, which defines a recession, has gotten the financial markets spooked and resulted in a near 20% sell-off in the major indexes since the highs set in the Spring of this year. Here is where I stand poised to create significant returns in equity investments. I understand how the persistently high unemployment will be an economic benefit.

Since this beginning of this month, when it took a statement from the Federal Reserve Chairman for many pundits and traders to realize what I already knew, there have been major declines in interest rates and commodity costs. You have likely already seen this in the sudden drop in gasoline prices. Metals such as Copper and Silver saw about a 1/4 decline in one week. That means everything from household appliances to paper clips and every means of transportation or energy production would cost less.

The third quarter GDP report released this week showed a modest 2.5% increase, much higher than expected and not pointing to a recession although I believe a deeper analysis does. This helped to boost commodity prices as traders saw this growth leading to greater demand for raw materials. If employment was higher then demand would follow as would inflation.

Borrowing costs for those who have already deleveraged will be going down. Mortgage rates on new homes are in the sub 4% range. Credit card and automotive interest rates are also declining as are the borrowing costs for school corporations and local government entities which account for much of our property tax expenditures. The tax demand is now being reduced.

Consumer buying power and discretionary spending will be increased by this lower demand scenario. The cost of driving to work for those that do and getting foods to the grocery store have now gone down.

This paucity of increased discretionary spending will not be enough to drive our economy back to a sustainable level. Businesses and consumers need tax relief to allow the financial market to operate. If the US was to adopt the FairTax as proposed by Fairtax.Org we would not be in the current financial predicament that currently plagues the country.

It is not the panacea that will cure all of our ills but in comparing the tax structures that the European countries experiencing economic doldrums operate under it is clear that the FairTax is a viable solution.

Fewer workers is not directly related to a declining economy or lower standard of living. To the contrary I argue that under this new paradigm it leads to a healthier economy. Those who have failed to adjust to or understand this may feel that the country, or world for that matter, is on the verge of an economic cataclysm. However, it is not.

So what does this all mean for you and me, society? Long term unemployment simply means that we are reverting to a former time when there were fewer job positions and a low unemployment rate. This should be and will become the norm. The pundits and politicians who are trying to convince us otherwise are simply wrong.

All euphemisms aside there is a large portion of our society that simply doesn't want to work but instead want to sponge off of those willing to make personal sacrifices. There is a large portion of our society that should not be home purchasers. We are currently experiencing the resulting economic repercussions of irresponsible bums who are defaulting on home loans. We have always sustained those who defaulted after sudden calamity such as divorce or illness. I have no affinity for those who have destroyed large portions of equity in homes for those of us responsible enough to pay our bills because they chose not to pay for their homes. Coincidentally, many of those who refused to be responsible for repaying their loans are also now unemployed.

Those who do want to are working. Those who do want to be financially responsible are doing so. The market has finally adjusted to this lack of job demand and financial irresponsibility.

The demand of the mendicants does still remain high and the politicians are playing to that crowd. Ultimately they will lose and the lethargic who have no desire to be productive members of society will live on the fringes of survival. Such is what is now happening in Greece.

CNBC reports that there are 3.2 million unfilled job openings in the United States. The latest government figures show that the number of job openings in manufacturing rose from last year and the number of open construction jobs as of July is up 267% from July of last year. Yet Obama wants to further increase our national debt by implementing a jobs bill to create construction jobs at a cost to taxpayer's of about $250,000 per job.

The proletariat may postulate that the current high unemployment is the result of a result of lack of job opportunities and the need for government to create jobs. To the contrary it is a result of government action. Particularly paying people not to work. CNBC has also recently reported that many of the people receiving long-term unemployment compensation have stated that they are not planning to get a job as long as they can receive those taxpayer funded payments.

Another fabrication being promoted by politicians is the false premise that a lack of formal and expensive education has resulted in the high rate of unemployment. This push for more formal training/education is the antithesis of employment. The resources and money being expended on wasted education has resulted in less opportunity for consumers to distribute discretionary dollars to employers and for the employers to hire.

A nation full of trained monkeys will not lift us out of an economic abyss. People who have a desire to be educated and apply that knowledge are much more productive than trained automatons. "Self-education is the best there is" - Steve Wozniak, co-founder of Apple Computer speaking on Steve Jobs lack of college education and his development of the world's most valuable company. This axiom is well-known and embedded into the minds of our best entrepreneurs but lost among the docile masses.

The high unemployment rate and the redistribution of labour demand will have a positive impact on our family structure. This must be considered the pinnacle benefit of this new employment paradigm.

One of the results of the pursuit of full employment for all adults, parents of children living with them in particular, has been the travesty of the systemic abuse of children being raised in institutional babysitting centers.

Higher unemployment places more parents in the home with their children. The loss of extra disposable income should, I emphasize should, lead to healthier home-cooked meals being prepared for the children. At least one parent will be available for providing necessary life-skills, education and nurturing that are some of the neglectful aspects of the institutional centers. A vestige of this once viable and successful family structure now rarely lives on outside the Hollywood reproductions but could see a resurgence based upon continued high unemployment.

Another positive is that the divorce rate has declined and should continue to decline under a high unemployment, single earner family structure. High unemployment has removed some of the profit incentive from divorce, especially since men have been affected by job loss in a significant and disproportionate way.

Ultimately it is the private sector, the free market that will have the greatest impact on employment. It is then incumbent upon the so-called workers to posses the skills and desire to work if employment is to increase. But as I have illustrated here, there are significant benefits to a smaller labour force and we should not see high unemployment as a bad thing.

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