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The Jobless Recovery

A Commentary BY Lawrence Kudlow

Saturday, September 05, 2009

The jobless-recovery theme re-emerged on Friday with the arrival of a disappointing employment report. The daunting number was the unemployment rate, which jumped from 9.4 percent in July to 9.7 percent in August. This is a big-versus-small-business issue. Sort of the haves versus the have-nots.

The large companies are gradually recovering as a result of major cost-cutting, inventory reduction, and a lean-and-mean return to profitability and high productivity. So the payroll survey registered a 216,000 job loss, the smallest drop in over a year.

The household survey, however, which picks up small, owner-operated, LLC/S-Corp-type businesses, registered a devastating 392,000 job loss, which follows losses of 155,000 and 374,000 in the prior two months. This is the source of the unemployment-rate jump, as 466,000 newly unemployed were scored in the report.

So while the big companies are getting healthier, the smaller firms are being left in the dust. Unfortunately, small businesses provide most of the new job creation in the United States.

Veep Joe Biden is out there saying the Obama stimulus plan has saved or created 150,000 jobs in the administration's first 100 days and another 600,000 in its second 100 days. But he sure isn't talking about small-business jobs.

In fact, it's hard to know what he's talking about. Uncle Sam has borrowed $388 billion in the second quarter and is scheduled to borrow $406 billion in the third quarter and nearly $500 billion in the fourth. In order to provide $152 billion in so-called fiscal stimulus, the government is draining close to $800 billion from the private-sector savings supply -- $800 billion that will not be invested in new-business enterprises, including small businesses.

Borrowing from Peter to redistribute to Paul is not fiscal stimulus. It's a fiscal depressant. Small businesses are having enough trouble getting their hands on credit. And now they can't find enough capital for new start-ups. The government prospers, but the small-business sector sinks.

Then there are all the tax and regulatory threats related to health care and energy reform. Until Obama retreats from his plan for a government takeover of the healthcare sector and a cap-and-trade program that will cripple the energy sector, the cost of hiring the new job will continue to rise.

The threat of higher payroll taxes and energy costs is more than enough to deter new hiring. Taxes on upper-end investors are going to rise, too, and there may be a health care surtax on top of that. And don't forget that small businesses pay the top personal tax rate, which is going up. Oh, and how about the recent minimum-wage hike? Yet another business cost.

So while the government doles out money for transfer payments and one-time temporary tax credits, the ensuing increase in the private-sector tax-and-financing burden becomes a complete deterrent to new job creation, as well as capital formation.

We're going to recover. Improved ISM reports for manufacturing and services, along with better profitability for big corporations, suggest we're looking at a mild, V-shaped recovery of 3 percent. But it will be a jobless recovery.

Of course, if Obama pulls the plug on his new government-insurance plan, and all the spending, taxing, borrowing and regulating that goes along with it, the stock market will rally at least 500 points -- at least . Investors understand that an Obama retreat on government-run health care will lead to stronger economic growth for America's vibrant health care industry -- and small businesses in general.

With all this, why is Wall Street so shocked by the recent gold rally, with the yellow metal marching back toward $1,000 an ounce? The run into gold is a clear revolt against paper money and financial profligacy.

The Federal Reserve's monetarist experiment to balloon the money supply will backfire with much higher future inflation unless the economy is capable of generating enough new investment and jobs to produce the goods to absorb all the new money. Indeed, this is a worldwide problem. Too much cash chasing too few goods.

The G-20 finance ministers are meeting in Pittsburgh this weekend, although nobody there has an exit strategy from the money explosion that has been aimed at solving the financial meltdown. None of the big countries have plans to reduce marginal tax rates to promote economic-growth incentives. There is no golden anchor of currency value and no exit strategy from the potential inflation effects of the new-world monetarism.

The bottom line is that governments today have no financial discipline. And while growth will reappear, it may be a meager sort, with incipient inflation pressures plaguing the new recovery.

COPYRIGHT 2009 CREATORS.COM

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