A very interesting article in Seeking Alpha over the weekend included the above chart.  It is hard to read this chart and not conclude that to reverse unemployment, we need to encourage investment.  Assuming the data are correct, it shows 60 years of direct correlation between investment and job creation, and,  lack of investment and recession.

So what should Congress and the Administration be doing to “create jobs”????

In December, the House passed a bill and then early this year, in bipartisan review of the bill, a consensus bill was ready for vote just last week.  That appears to have been scrapped by Harry Reid in a fit of pique.  What did it include?  “The bill, which passed the House December 16, redirects $75 billion of TARP funds to invest in infrastructure, job training and to hire and retain teachers, firefighters and police officers.  The Jobs for Main Street Act invests $48 billion in roads and bridges, school renovation, clean water and housing.  The bill provides for $27 billion to hire and retain teachers, firefighters and police officers.  In addition, the bill extends emergency unemployment benefits through next June and extends a 65% subsidy for COBRA coverage for laid-off workers, also through June of 2010,”  explained Congresswoman Chellie Pingree from Maine.

Job training, extending unemployment benefits, hiring more teachers and firefighters and police officers….does that sound like a list of things that will encourage investing in our economy?  Or does it sound like the sort of list that will keep politician’s in office by playing to their union constituents?

Here’s my take on how we encourage investment and create jobs:

1.  Get government out of the way. The regulation of business in general does a great deal to interfere with the effects on business of market forces .  Congress should make a list of all laws that restrict the opportunity to profit and challenge itself to remove 15% of those laws from the books in the next year, with a further promise to reduce the number by 10% every year for at least 5 years.  What am I talking about?  What about laws like the Fair Labor Practices Law.  It tells you the hours that you are allowed to let an employee work, the minimum wages you must pay, the record keeping you must do, and sets rules for overtime.  Or, how about the National Labor Relations Act?  Or how about Federal Licenses for regulated businesses?  Just look at the list of required licenses and fees at Business.gov.  My point is that you almost need an attorney to lead you through the maze to start a business or to expand into different “regulated” areas.  And the Feds are only a part of the problem.  State and local laws present even more barriers to businesses.

2.  Raise the Fed Funds rate from the zero floor where it now resides. I know this is counterintuitive, and, I am open to suggestions on this one.  But, here is my logic.  As the Fed was driving its interbank lending rate to zero, it was doing so to make loans affordable.  The Fed wanted to make homeownership possible for more people and there was a lot of political pressure to do that.  One lesson that I learned long ago is that a deal that is good for only one party is not a good deal.  If lenders can’t make any money, why sould they lend?  Today, businesses can’t borrow money to invest in their ventures (which would create jobs) because people/institutions with money aren’t lending.  They aren’t lending because they can’t make enough on their loans to cover the risks involved and still profit.  They see risks like the potential for nationalization of industries, hyper government spending and the threat of inflation, the cost of new mandates from government, new and increased taxation pressures, etc.  With all this in mind, and the fact that they can’t get but a few per cent to lend their money, they decide to hold cash.  Without the availability of risk capital, their will be little or no investment in our economy and unemployment will continue at all time highs.  UPDATE – 2-17-10 9:00 a.m.:  I wrote this over the past weekend and then this morning had a chance to speak with and listen to Scott Chambers, Professor of Finance at Linfield College.  Scott reminded me that banks are now borrowing money at under 1%.  That means they can buy government bonds at 3+% and make money with virtually no risk.  Why would they want to lend to a small business that is fraught with risk?  He recommends that we get banks back into the business of banking – borrowing from savers and lending to borrowers.  The fact that banks are using their money in easier ways to get a return means the funds are not available for business investment.

3.  Encourage the industries that build, grow, and mine things. True added value is best generated in mining, manufacturing, and farming, not in government and service industries.  It seems that Washington is interested in propping up government activities and service industries while they choose to over-regulate the ones that add the most value.  Take the situation in the Northwest.  Town after town has lost its lumber mills and all the jobs that go with them.  Why?  My view is that the overregulation of the Timber Industry has made the harvesting and milling of lumber unprofitable in many cases.  Why would we want to shut down an industry that has a renewable resource and for which we have such perfect land and climate?  Is the spotted owl truly at risk and is it more important than the timber industry?  We need to make it easier, not harder for our businesses to manufacture or mine or grow products.

4.  Rebuild the SBA Loan Guarantee Program and scale back or drop most other SBA Programs. The SBA loan guarantee programs make capital available to small businesses.  This is where most of there value lies.  Most of their other programs, like SCORE, Small Business Development Centers, and Women’s Business Centers use tax dollars with much less effect.  They should be scaled back dramatically, if not phased out, in favor of using that money for loan guarantees.  In 2009, the SBA had a $12 Billion budget and only $7 Billion of that was for loans/guarantees.  When you have limited funds, they should go where they make the most impact – loan guarantees.

5.  Rebuild the USDA Loan Guarantee Programs and scale back or drop many other USDA Programs. Today over 70% of the $146 Billion in the USDA budget will go to Nutrition programs. (see page 7)  The USDA has become a huge pool for the transfer of tax dollars to the needyIt should be renamed the US Department of Nutrition.  It has also become the best friend of corporate agriculture and often the enemy of most small farms and the slow food movement.  If you want a few interesting anecdotes that illustrate what the USDA does, read the book “Everything I want to Do is Illegal” (Joel Salatin).   USDA funds could be used to help farmers finance long term projects like planting crops.  Loan guarantee programs open many opportunities for farmers to increase production and to employ more people.  Yes, the USDA has some wonderful programs of research and watershed protection, etc.  No, many of those programs do not produce private sector jobs.  Again, I could see a staged withdrawal from the programs that do not produce significant results.  If private industry has been able to cut back 10-25% across the board over the past two years, why should not our government agencies do the same?

There are too many other issues that involve reducing the size of government and I want to stay focussed on creating jobs.  Let’s stop here and wait for your comments.  Let’s also say that any candidate for Congress who campaigns on the basis of adding any new program (without a twofold reduction in other programs) should be shown the door before the party begins.  You want to create jobs in the private sector?  Use much of the money wasted in transfer programs to guarantee loans to businesses.  Then businesses will invest and jobs will be created.