Thursday, August 26, 2010

Is Subsidized Employment the Answer?

Yesterday, Lynn Tilton was a guest on Bill Bennett's show. She suggested that the way to solve America's problem with people staying on unemployment forever was to adopt a policy of "subsidized employment," like they have in Germany. The way she explained it, if a company was about to lay off people, it would go to the government and the government would pay to keep those people on the payroll so they could keep doing something productive. It would keep factories from going idle, etc. She provides additional explanation on her blog.

While I agree that it would be preferable for people to engage in productive work over drawing a check for doing nothing, I am concerned that this proposal could create perverse incentives. In particular, if a plant is idle, it is likely because no one is buying what the plant is producing. Creating more things that few people are buying will only increase inventory (i.e., supply) and result in lower prices for those goods. How much good would it do to put all of GM's factories to work to build more cars that no one wants (or can afford) to buy? This seems to me to be a temporary fix that could ultimately result in a colossal misallocation of resources and massive market distortion. On the other hand, more people might buy cars if they were cheaper and they might be better able to compete globally. But does a new car really add value to a society that is already awash in automobiles?

Tere is no easy solution. What could the unemployed do that would truly create long term value so that the taxpayer's get something in return for the payments they are making? I am no fan of FDR's policies, but it seems to me that we should be able to find something that could be done to create value without using something like "subsidized employment" to build a bunch of unneccessary inventory. What if, in order to get unemployment benefits beyond, say, 6 months, you had to be willing to work at a project to benefit all of society? Maybe that means building a dam or building some windmills. Maybe that means modernizing and rebuilding schools that actually need it (or roads that actually need it), unlike this crap where we are paying for Obama-esque re-election signs to build bridges to nowhere and pave roads that don't need paving. Or does it mean subsidizing employment so we won't have to buy from China?

While I would love to see a free market solution, there is no way that will happen with King Barry in charge. So, we must decide where to get the most bang for the buck. Certainly, paying people to sit at home and watch Oprah is a recipe for disaster. That is creating its own set of perverse incentives and must be stopped. I would certainly prefer subsidized employment to what we currently have - subsidized unemployment.

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