85% of Democrats and 63% of Republicans are WRONG!!
85% of Democrats and 63% of Republicans are WRONG!!
That part of President Obama’s jobs plan, which is to transfer federal funds to the states to assist the states in maintaining the employment of or re-hiring the teachers, firefighters, and police officers who have been laid off due to insufficient finances, is supported by 75% of a combination of Democrats and Republicans, and they are, absolutely, WRONG.
Perhaps ‘wrong’ should be re-characterized as ‘confused’. The confusion is a rational phenomenon due to the ‘apparent’ goodness of the goal, i.e., to maintain the employment or re-hire those who were laid off.
The unintended consequence is that this transfer of funds is naïve political triage and will only delay the states from taking the proper actions, which, ultimately, they must and will do.
The greater the passage of time, from now until the states embark upon those proper actions, the greater will be the increase of the inevitable problematic results.
Whereas deflation will cause problems, those problems would have been substantially less had Mr. Greenspan and the Fed not panicked, at the end of 2000.
The FOMC (Federal Open Market Committee) correctly perceived the tidal wave that was hitting our shores, but rather than accepting the inevitability of this economic ecological phenomenon, it elected to fight it by, precipitously, reducing interest rates, which began on January 3, 2001, when the Federal Funds rate and discount rate were cut by 50 basis points (1/2 of one percent) to 5 ½%. They were cut another 50 basis points on January 31, 2001, and 300 basis points more, during the ensuing eight months.
The precipitous cuts in short-term interest rates gave rise to ‘funny-money’ and, rather than allowing a natural reduction of asset prices (most notably real estate), these lower rates not only supported the prices, but exacerbated them. A typical example was the home of a friend in Modesto, California, which increased in price from $100,000 (2001) to $400,000 (2006).
The FOMC, metaphorically speaking, moved us from the 2nd floor to the 22nd floor and should have known that a drop from the 22nd floor would be much more damaging than from the 2nd floor, i.e., it had set the stage for the inevitable unintended consequences.
Ignorance is not always blissful, and, certainly, neither is stupidity.
Concluding, there should be no transfer to the states for the stated purpose of maintaining those jobs. Each state must resolve its own financial issues. The best resolution would be to reduce costs by reductions of salaries and benefits, rather than by layoffs (poisonous). The reductions should be rational and designed to mitigate the stress upon the affected employees.
It should be recognized that if real estate prices have dropped 30% and if the cost of home ownership or renting is 35% of one’s income, a reduction of salaries and benefits approximating 10-11% should be tolerable, as a starting point.
mz
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