Safety Net Keeps Unemployment High

At the Detroit jobs summit, President Clinton and 176 delegates from France, Germany, Britain, Canada, Italy and Japan talked about unemployment while munching their way through a five-course dinner with terrine of duck, stuffed baked rainbow trout, roast tenderloin of beef, and Hawaiian chocolate stuffed with raspberries.

They concluded that unemployment was not their fault, but the result of technological changes that replace labor with capital.

Clinton, in his keynote speech, said there was a new fear that improvements in productivity “may be a job threat, not a job creator.” This brought great relief to the delegates, who were afraid that their policies might be blamed, but progress is one thing with which they could never be associated.

The solution, Clinton said, is more retraining programs and a larger social safety net—a stale prescription that is challenged by the latest studies of job losses. Indeed, the outlook for the unemployed in the United States, Europe and Japan would be brighter if the job summiteers had stayed home and read Richard Vedder and Lowell Gallaway’s new book, Out of Work: Unemployment and Government in Twentieth-Century America. The authors claim that unemployment is caused by government taxes on employment, government regulation of labor markets and macroeconomic “full employment” policies.

Vedder and Gallaway, both noted labor economists at Ohio University, show that government always blames unemployment on factors outside the labor markets—such as consumer demand, interest rates, and currency exchange rates—rather than on its own policies that make labor more expensive. Regulations and taxes drive the cost of labor above the market wage, thus leaving many without jobs.

It is well-known that Franklin Roosevelt’s New Deal policies failed to alleviate unemployment during the 1930s. But this doesn’t mean the policies had no effect. Vedder and Gallaway amass relentless evidence to try to prove that the New Deal did terrible harm by almost tripling the unemployment rate.

Among the most striking conclusions of Out of Work is that in 1930 whites had a higher unemployment rate than minorities. Vedder and Gallaway attribute the astonishing reversal in employment situations to the impact of welfare and public assistance on labor markets. The compassionate policies designed to do good have done harm instead.

As government intervention increases, the long-term unemployment rate rises. In the United States, it has risen from 4 percent or 5 percent to about 6 percent or 7 percent. If Hillary Clinton’s health-care reform package is enacted, the unemployment rate could jumpt to 9 percent.

In Europe, where payroll taxes are often 50 percent or more and labor markets are extensively regulated, there have been no net new private sector jobs created in 20 years. In the countries that comprise the European Common Market, the unemployment rate has tripled since the 1960s.

Writing in the Wall Street Journal on the day the jobs summit opened, Columbia University economics professor Edmund Phelps told the summiteers that “your taxes kill jobs.” The high taxes on employment and income have priced European labor out of world markets and “have been mass job-killers.”

Double-digit unemployment rates are becoming the norm in France and Germany. Like Vedder and Gallaway, Phelps says that governments are fooling themselves when they blame unemployment on anti-inflationary central bank policies and strong currencies.

Trying to share the unemployment by moving to four-day workweeks simply compounds the problem by adding to the regulation of labor markets.

Congress recently repealed former President George Bush’s luxury tax on boats because it virtually had destroyed the boat-building industry and the jobs associated with it. It is even more harmful to tax the jobs directly with payroll taxes and health-care mandates.

If Clinton isn’t careful, he is going to scare progress away to Latin American and China and make the United States a protectionist backwater.