Opinion: Here's an Idea Obama Isn't Likely to Hear at His Jobs Summit

(Dec. 2) - President Obama has said he wants fresh ideas for his jobs summit Thursday. Here's one he's not likely to hear: Don't do anything. Economic indicators suggest the jobless rate will fall on its own, and "doing something" could easily hurt more than it helps.

Don't think so? Take a look at history.

In 1921, amid double-digit unemployment rates, Secretary of Commerce Herbert Hoover called an Unemployment Conference, inviting the nation's leaders to talk about how to lower the jobless rate. President Warren Harding ignored the advice that came out of this conference and did nothing. In two years, the recession was over with an unemployment rate below 4 percent.

Eight years later, in contrast, then President Hoover called business leaders together to talk about unemployment, and he pushed through several of their recommendations, including a successful call for higher wages. What happened next? Unemployment steadily rose and we entered our worst downturn in history.

More recent history also shows that government attempts to solve the unemployment problem rarely work. In February 2008, leaders of both parties endorsed a $160 billion stimulus bill to nip the newly emerging recession in the bud. The unemployment rate was 4.8 percent. A year later, the unemployment rate was 8.1 percent and 4,327,000 jobs had been lost.

So we did it again -- with a stimulus package nearly five times bigger that was full of tax cuts designed to quickly stimulate spending and "shovel ready" public works projects to create jobs. The president predicted 3.5 million new jobs and an unemployment rate below 8 percent. Nine months after it passed, the unemployment rate is 10.2 percent and rising, and employment has fallen by almost precisely 3.5 million.

This isn't a fluke. The massive spending programs of the Great Depression (the Works Progress Administration employed 3.5 million workers -- nearly 10 percent of the labor force -- at its peak) did nothing to stop the longest downturn in American history. In Japan, the 1990s saw not one but three stimulus packages -- and a dramatic rise in unemployment and economic growth slowdown -- in what the Japanese now refer to as "the lost decade."

Why don't these programs work?

First, they have to be financed, and the consequences of that financing almost always have adverse economic effects. The Obama administration has gone on a fiscal binge of unprecedented proportions, complete with back-to-back trillion-dollar deficit budgets in a nation that had never seen a deficit even half that large before. Who is going to buy the bonds issued to pay for stimulus, and at what price? If Americans do it out of increased savings, consumer spending will be weak. If foreigners do it, it will be at a price -- probably higher interest rates now (reducing investment and some consumption spending) and huge debt obligations for our children. If the Federal Reserve tries to defy the laws of economics through easy money policies, inflation will erupt.

Second, the political process leads to wasteful spending on pet projects. My favorite in the current stimulus package is Harry Reid's proposed high-tech train between America's two leading fantasy lands, Disneyland and Las Vegas, through that high population density corridor, the Mojave Desert.

Third, there are always significant implementation lags with fiscal policy;j it takes months if not years to get projects started.

So what should we do? My recommendation is that we do what Harding did: nothing.

There are some very positive signs on the horizon in labor markets.

Productivity has been sharply rising as firms pare costs to the bone. Wage growth has slowed dramatically. The "adjusted real wage" -- wages adjusted for inflation and productivity growth -- is falling dramatically, something Lowell Gallaway and I have shown leads ultimately to rising employment and, after a bit of a lag, falling unemployment. Markets have powerful and efficient self-correcting mechanisms; let them work.

If the president feels compelled to do something, he should take off the table policies that will end up boosting the adjusted real wage, such as card check legislation (favoring unionization that would raise wages). He could also veto rather than sign bills extending unemployment insurance benefits. Extending benefits has strong emotional pull to it, but the economic literature is pretty clear that doing so reduces incentives for unemployed workers to get new jobs and increases their wage demands.

The bottom line is that we should soon start seeing light at the end of the jobs tunnel -- unless the Unemployment Summit leads the government to add more tunnel.
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Richard Vedder is Distinguished Professor of Economics at Ohio University and co-author with Lowell Gallaway of Out of Work: Unemployment and Government in Twentieth-Century America.