Solving the Jobs Problem

As the American Recovery and Reinvestment Act winds down, the unemployment rate remains over 9 percent and the economy is idling.  It is increasingly clear that Keynesian stimulus has failed to get the economy where it needs to be.  Now what?  The U.S. economy faces problems that are structural and long term, not merely cyclical and short term.  This helps explain why Keynesian policies failed to stimulate adequately.  More importantly, appreciating the fact that the American economy faces profound structural pressures is the first step on the road to sustained recovery and perhaps the next growth boom, say Arnold Kling, an adjunct scholar at the Cato Institute, and Nick Schulz, a DeWitt Wallace Fellow at the American Enterprise Institute.

Government stimulus can sometimes be effective at returning people to their old jobs, but the market is telling investors and entrepreneurs that those jobs are not needed anymore.  The two sectors of the economy that are increasing most as a share of output and employment are education and health care.

• Growing as they are, education and health care will increase in importance this century while other sectors undergo a relative decline.
• These sectors are where demand is rising and where there is potential for jobs to be created.

So what's the problem?

• The problem today is that government policy is impeding innovation and job creation in these sectors.
• Both education and health care are already heavily influenced or controlled by federal and local government.
• That means that the evolution of those sectors is driven by top-down command and control, rather than by bottom-up innovation.

To revitalize these sectors and revive the American job market, we must open up these industries to competition and entrepreneurial reform.  This will require tolerating a certain degree of messy experimentation.  But entrepreneurial growth in these sectors is what will get the American economy back to work, say Kling and Schulz.

Source: Arnold Kling and Nick Schulz, "Solving the Long-Term Jobs Problem," The American, July 27, 2011.

The Truth about Ethanol

Congress is debating whether it's time to end subsidies for ethanol from corn.  This debate comes with good reason: while using more ethanol might reduce the use of imported oil, the production of ethanol has its own costs, says Scientific American.

The various costs associated with producing ethanol are alarming.  Despite the fact that in recent years the fermentation process has become more efficient in making enzymes and prices have gone down, ethanol continues to be more expensive than petroleum-derived gasoline.

• Government subsidization of ethanol production has resulted in $19 billion in tax breaks between 1980 and 2000 to the ethanol-from-corn effort, according to the Government Accountability Office.
• Substantial profits have resulted for a handful of large private enterprises.
• There is also the production cost of building the new infrastructure for ethanol -- it is expected to take decades to build the needed additional 300-plus bio-refineries.

The push for increasing ethanol production has come despite a 1986 report that ethanol "cannot be justified on economic grounds" and "had no long-term prospect for survival without massive new government assistance."  Additionally, the purported environment benefits of using ethanol include reduced greenhouse gas emissions.  This benefit, however, seems to be offset by other environmental externalities from increasing ethanol production.  At least one study has found that all of the world's most significant biofuels combined do more damage overall than fossil fuels.

Finally, arguably the greatest concern over ethanol is that it is raising food prices.  While the livelihoods of rural communities are enhanced through increased biofuel production, less agricultural goods are directed towards feeding livestock and filling market shelves, among other things.

Source: David Biello, "Intoxicated on Independence: Is Domestically Produced Ethanol Worth the Cost?" Scientific American, July 28, 2011.