STOP DIGGING / BARRON´S EDITORIAL COMMENTARY ( VERY HIGHLY RECOMMENDED READING )

EDITORIAL COMMENTARY

Stop Digging

By THOMAS G. DONLAN

Uncle Sam's largesse is misplaced.


THE PRODUCTIVE ECONOMY HAS BEEN cranky this year, and Santa Claus will leave a lump of coal in its Christmas stocking. There won't be any Hanukkah gelt for recalcitrant producers, either.

Entrepreneurs, bankers, shopkeepers and investors will have little to do this holiday except go off in a corner and feel rejected as they prepare to pay their taxes. Borrowers and beggars will receive the bulk of federal attention this year.

"There are more than seven million fewer Americans with jobs today than when this recession began," said the official American Santa Claus, President Barack Obama. "That's a staggering figure, and one that reflects not only the depth of the hole from which we must ascend, but also a continuing human tragedy."

It is a deep hole, and millions of Americans are without jobs. But the relief efforts the president proposed last week keep digging the hole and miss the main way jobs are created. Its main points are extended unemployment compensation, aid to states that have budget crises, infrastructure projects such as high-speed rail lines, highways and airports, and a "cash-for-caulkers" program to subsidize home insulation.

Objections Overruled

The president hasn't provided detailed proposals, but some things should be clear:

People who haven't responded to the market's clear signals since 1973 to save on fuel bills by insulating their homes probably aren't going to respond to nonmarket subsidies, either.

There are plenty of infrastructure projects -- useful and otherwise -- in the pipeline from the last economic "stimulus package." Supposedly they were "shovel ready," but time runs slowly in government contracting. The new package will throw $50 billion more into jobs and spending and deficits in 2011 and 2012, whether or not it will produce real returns.

Many state budget crises are curiously artificial. The worst, in California, is almost entirely of the state's own making, thanks to generous contracts with public-employee unions and a state income tax that tries to tax only the rich. Cutting spending of any kind, especially reducing wages across the board, seems politically impossible, as is broadening the base of state taxation. But things that are politically impossible never change without a crisis, and the feds shouldn't take the states' feet out of the fire.

Paying people to be unemployed is kind, but it's no way to get them to take jobs, especially low-paying jobs. Relief should be conditioned on poverty, not lack of income. And jobs would be more plentiful if Congress suspended minimum-wage increases and removed the threat of unionization by card-check.

Recycling the bank bailout funds in the Troubled Asset Relief Program may be the worst part of the president's new program. It was bad enough borrowing hundreds of billions to rescue banks, but by some miracle of accounting, the banks are paying it back. Rather than paying back the Chinese, as previously promised, the president wants to turn the TARP into a revolving credit card and apply it to artificial job creation.

Even when the administration talks about tax cuts, it misses the point. Obama called for an extension and expansion of a capital-gains-tax holiday for small businesses. To create jobs, businesses should have a permanent income-tax holiday. Profit is the true job-creating stimulus.

We Are the Enemy

President Obama declared that "we," presumably meaning the federal government, have "reduced the deluge of job losses to a trickle." He also said "we," presumably meaning the naughty private sector, "aren't yet creating jobs at a pace to help all those families who've been swept up in the flood."

Unfortunately, the president and his elves don't seem to understand why the private economy creates jobs, or how it does it. He overlooks the essential purpose of all businesses -- to supply and satisfy customers' needs at prices the customers will pay, at costs that will eventually earn the businesses a profit. The profit serves as their signal to make more and sell more, and only then will businesses hire more workers.

Businesses will sell at a loss for as long as they can, if they have hope of that eventual profit. A stimulus to customer demand or a subsidy to business production may change the variables of price and cost, but it doesn't change the long-term expectations of business owners and investors. They know that stimulus programs end, subsidies are transitory, tax cuts are due to expire and manipulated interest rates will go up.

Business also knows that there are taxes in the health-care reform bills,taxes in the cap-and-trade bills to limit carbon-dioxide emissions and taxes in the bills to protect consumers of financial products. Some are direct taxes on business; others will tax their best customers and reduce their purchasing power. Some are poorly motivated, such as the transactions tax on securities. Some are well-motivated but poorly designed and poorly timed, such as the cap-and-trade system that will function as an energy tax. Others are just plain weird, such as the tax on cosmetic surgery proposed in the Senate's health-care bill.

Urban Pioneering

There are some things that the federal government could be doing, and there are people the feds could push to create jobs.
For example, former Treasury Secretary Paul O'Neill suggested the other day that the feds should have a purpose in mind when they hand money to states and cities. Federal money, he said, should be used to demolish abandoned homes and factories so that the land can be sold to new developers.

Too many cities are trying to slice the pie or steal the pie rather than making the pie bigger. New buildings are only the first step toward new cities. Private developers also should be empowered to create new business-friendly municipal governments to replace the city governments that made such messes in their own hometowns.

Most U.S. cities have areas that are so blighted that crime is their only industry, and in some areas even crime doesn't pay. City officials who have abandoned their own economies are in need of a push out the door.

Let Americans have more enterprise, and the jobs will create themselves.