My post on fundamental assumptions generated some good discussion which began waxing economic in flavor. As part of that discussion I had a new idea about a more reasonable approach the federal government could take to soften economic hard times without outright manipulating our expectations of reality as they do now.
I should start by clarifying my perspective on what the federal government does and what is economically realistic. Economic realism insists that we recognize the inevitability of economic downturns. They are going to happen. Unfortunately the assumption at the federal level seems to be that we must strive for perpetual economic growth – we might tolerate one or two quarters of a mild contraction but anything beyond that is unacceptable. As proven by our significant and now two year old recession sometimes the economy needs to undergo a much harsher adjustment – especially after the government has been pumping the supposedly healthy market with perpetual stimulus for years. (I know, they have not called anything they did stimulus until the stimulus bill in early 2008.)
Personally I think a better approach to the federal government smoothing the rough spots out would be to establish a baseline – let’s say 5% unemployment – where any state meeting that baseline would not receive any federal economic assistance to combat unemployment. Then they would look a the spread between the unemployment rate of various states and be allowed to give economic aid to any state with at least 5% higher unemployment than the state with the lowest unemployment. The upper limit of that aid would be equal to 1/3 of the difference in unemployment between the higher of 5% and the unemployment rate of the state with the lowest unemployment with the limitation that government aid cannot help one state leapfrog another. Let’s show what that would mean with current (October 2009) numbers.
The state with the lowest unemployment is North Dakota at 4.2% so any state with more than 9.2% unemployment could get aid from the federal government to help lower their unemployment. For the October 2009 numbers that would mean that only 21 states could get any federal assistance rather than having the federal government trying to jump start the economies of all 50 states. Of those 21 states Arizona, Missouri, and Washington (at 9.3% unemployment) could receive aid equal to 0.3% of their respective economies (they would not be allowed to leapfrog Idaho and new York which have 9% unemployment and cannot receive this federal aid because they are within 5% unemployment of North Dakota’s unemployment rate). In fact, 12 of the 21 states would receive enough aid to bring them equal to the 9% unemployment rate of Idaho and New York because that would be less than 1/3 of the difference between their actual unemployment rates and the magical 5% unemployment. At the other end of the scale Michigan, with the highest unemployment would have their rate cut below 12% from their current 15.1%.
If every state had unemployment rates over 5% the new benchmark would be the lowest unemployment rate of any state. If we imagine that lowest unemployment rate was 6.5% (adjusting all states up to 6.5% and leaving states with higher unemployment where they are) only states with unemployment over 11.5% would receive aid, six states in all, and only Michigan would get the full 1/3 of the difference between their rate and the base rate of 6.5% (leaving them with 12.2% unemployment).
If all states were below 5% unemployment or if they were all clustered between 3.5% and 8.5% unemployment then the federal government would not give unemployment assistance to any of the states. If anyone is curious to see them, I have all my numbers in a spreadsheet that you can download.
The fact is that of the economy of the entire nation is slumping then no government program can provide a solid foundation to real economic growth – all it can do is produce the illusion of economic stability. Real economic growth can only be build on fundamental economic change, not on the illusion of stability provided by printing money and manipulating interest rates. While committed free marketers would likely hate my proposal just like they hate the current government intrusions in the economy and while those who don’t object to socialism will find my suggestions very harsh on downtrodden regions of the nation, I think that my idea is much better at providing a cushion for the hardest hit areas while allowing the economy to shrink or grow towards whatever the realities of our national economy are which the government tries so hard to mask right now as if our perceptions were the only economic reality worth considering.