Solving Unemployment

By Dina Shalab
Economics - Thursday, April 21, 2011

The twin predicaments that arise from alternating acclivity and declines in the level

of economic activity for over several years are unemployment and inflation. Among the

long-term jobless, many fear the question- is unemployment inevitable? Are there any

cures to mitigate its dire effect? These questions are on the lips of Americans who are

compelled to face one of the most vital calamities society has to grapple. In accordance to

alleviating 26 million unemployed workers, specific policy proposals that can ensure

worthwhile employment and stimulate workforce flexibility are focused in three main

areas: encouraging entrepreneurship, access to capital by easing credit, and eliminating the

corporate income tax.

In the midst of today’s recession, entrepreneurship has emerged as a powerful

apparatus for economic growth and the development of technological innovation. Further,

entrepreneurs help build communities in ways such as providing jobs, conducting

businesses locally, creating and engaging in commercial networks, investing in communal

projects, and giving to local charities. Government efforts to foster and cultivate free

enterprise emphasize small business loans to lessen the burden of risk. Long-term regional

employment growth created by entrepreneurship creates growing awareness to create

new jobs and spawn wealth within communities to bring new ideas and inventions into the

marketplace. In addition, continued profitability and controlled growth are key

contributors for small business to leap toward productivity gains. According to

(MainStreet.com), “the top five leading entrepreneur-friendly states that have specific

entrepreneurial goals incorporated into their strategic plans are: South Dakota, Nevada,

Texas, Wyoming, and Washington.”1 Several entrepreneurial strategies for states have

emerged as “best practices identified by the National Governors Association Center for Best

Practices.”2 Entrepreneurs are educated and committed risk-takers who reap the rewards

of an innovative venture. They are managerial decision-makers who marshal resources to

create success for their company. Before the government mandates entrepreneurships, we

should allow small startups to run for two years requiring no license, freedom to work

from home regardless of zoning prohibition, and no business tax filings. Thus, this will

mean neither lawyers nor accountants infringing the pursuits of spirited entrepreneurs

seeking economic progression. In the early stages of development, securing capital is a

crucial factor that pertains to the future success of the company. Through direct

investment, states have the ability to assist free-enterprises in accumulating venture

capital, limiting tax credits and partnerships. Providing technical assistance with the

creation of small business assistance centers, financial and management guidance

programs, and science and technology corporations are chief valuable services for

entrepreneurs. Improving state regulations and licensing environments reduces the

burden on entrepreneurs seeking permits and licenses, hence one-stop business centers

serve as a point of commerce between magnates and state regulatory agencies.

Consequently, incorporating the registration and license process benefits both the state

agencies and businesspersons by reducing the duplication of processes, time, paperwork,

and resources required to suitably register a new business feat. Building intellectual capital
at state universities fosters entrepreneurship while superior research centers aid

universities in retaining top-faculty, spur technological innovations, and aid the transfer of

technology to the private sector. As a result, implementing entrepreneurship requires

capital to commercialize creative business models and market innovative ideas. Therefore,

hiring employees will help enlist others back to work in private-sector jobs to demote the

impediments to employment while eradicating the plight of ‘discouraged workers’ with the

aspiration of ensuring prosperity.

In the wake of the severe economic recession, the IFA (International Franchise

Association) began calling on the federal government to take action that would ease frozen

credit markets. Franchising gives small businesses stamina and an extra margin of help

through access to training, business methods, and marketing support provided by the

franchiser. Franchising offers the U.S. economy a strong foundation to spur job hiring by

creating incentives to encourage ventures to build more energy-efficient businesses. In

addition, providing “businesses access to capital by improving operation of secondary

markets will ensure that small business entrepreneurs will be positioned to help us lead

out of recession”3 and to restore employment gains back in the private sector. Small

business entrepreneurs experience difficulty in accessing capital. Therefore, Congress

needs to address the challenges to improve the availability of credit as chairman Ben

Bernanke calls “credit-easing”. Each of the Federal Reserves “credit-easing” diverse tactics

are cleaved into three groups- “lending to financial institutions, providing liquidity to key

credit markets, and purchasing long-term securities”4- to help renew liquidity to impaired

markets. The purpose of these tools is to ensure “that healthy financial institutions have

access to sufficient short-term credit.”5 The Federal Reserve and financial regulators have
prodded banks over the past years to ease financing to small businesses while President

Obama proposed two expansionary loan programs by the Small Business Administration.

President Obama stated on Friday, February 4th 2010 during a visit to Oasis Mechanical

Contractors in Lanham, Maryland: “Small businesses were responsible for the creation of

65 percent of new jobs over the last 15 years [and] the true engine of job creation will

always be business. What government can do is fuel that engine by giving entrepreneurs

and companies the support to open their doors and to expand and to hire more workers.” 6

Bank loans to small firms are primarily repaid through cash flow, and secondarily through

underlying collateral. As collateral values have plummeted, the Federal Reserve initiated

two new policies, the Term Securities Lending Facilities (TSLF) and the Primary Dealer

Credit Facility (PDCF), to fix the shortage of collateral that has potentially depleted the

capital levels of banks and imperil their ability to lend. The TSLF “extended the borrowing

term and expanded the types of collateral primary dealers could provide in order to

borrow treasury securities from the Fed. Primary dealers can now hold the securities for

up to 28 days (extended from overnight) and provide less-liquid securities as collateral,

including federal agency debt, federal agency mortgage-backed securities, and non-agency

AAA private mortgage-backed securities.”7 In addition under the PDCF, it created a lending

facility for primary dealers by authorizing the Federal Reserve Bank of New York. Thus

credit extended to primary dealers can be collateralized by a broad range of “investment-

grade debt securities.”8 Supplying liquidity to key credit markets outside the banking

system directly to borrowers and investors under the TAF (Term Auction Facility) require

coordination with the Treasury to purchase up to “$200 billion of asset-backed securities,

debts backed by car loans, credit cards, and student loans.” 9 Finally, to lower a broad range
of interest rates and foster easier credit conditions, the Fed has begun to buy longer-term

securities. Most notably, some “$600 billion in debt and mortgage-backed paper held by

federal agencies”10 was designed to increase the price of securities and thereby lower rates

paid for mortgages to improve the accessibility of credit for the purchasing of houses,

therefore supporting the financial and housing markets. Each of these Federal Reserve

“credit-easing” stratagems helps to restore liquidity to impaired markets and to push down

lending spreads to standard levels. The Fed’s “policy arsenal can be greatly expanded by

changing the composition of its balance sheet assets.”11 Consequently, with the federal

funds rate near zero, credit will unquestionably play a prominent role in boosting the full

recovery of the economic downturn, leading to more projects to be undertaken. The more

jobs escalating, fewer are unemployed. Fewer unwaged mean more of society with capital

to purchase merchandises. More people with money to buy belongings in stores would

mean more contracts selling products at stores, exporting goods to stores, and additional

productivity. As a result, those jobs would mean lower unemployment and more money to

spend. Federal Reserve Governor, Elizabeth Duke, confidently announced that: “A variety of

recent survey results paints a picture of increasing optimism about future sales and

business conditions and a corresponding easing of credit availability for small businesses

[and] more than 99 percent of all U.S. employers, created 65 percent of new jobs in the past

17 years, according to the U.S. Small Business Administration, which defines such

companies as independent enterprises employing fewer than 500 people.” 12

Just as banks have to retain an abundant amount of credit to safely lend so they can

absorb misplaces, companies have to accumulate heaps of capital so they can recognize

mistakes such as hires that don’t go through or projects that fall short. The corporate
income tax “is a highly destructive tax that greatly distorts proper economic decision-

making, taxes the same income more than once, is endlessly complex, and provides a

declining share of tax revenue in most countries.”13 Encouraging businesses to retain more

earnings by eliminating the corporate income tax while allowing them to keep those

earnings will give them the capacity and confidence to hire employees, hence corporate

taxes will increase. While this proposal may nominally make people richer, the money

must remain in the business to stay duty-free. As a result of this tax change, no wealthy

individual will be able to spend even a penny more. In all likelihood, businesses will reduce

dividends, owners of corporations will minimize their salaries, and businesses that are

setup as pass-through entities will convert from “S” corporations to traditional “C”

corporations. Further, less money will be spent on personal consumption and more will be

spent on productive business. Economists have long known that the idea and exercise of

the corporate income tax has been dying slowly for the last two decades. United States in

particular is seeking higher economic growth and employment by sharply cutting their tax

rates. To ensure corporations don’t just sit on their cash reserves, the Federal Government

should require any enterprise with cash, marketable securities, and assets unrelated to the

conduct of the business exceeding two years of expenditures must pay out a dividend equal

to the excess amount for two consecutive years. Along the lines, corporation taxation

reduces financial transparency, making it durable for investors to monitor corporate

behavior. As a consequence, corporate taxation hits taxpayers across the income spectrum.

The true encumber of corporate taxes not only pertains to stockholders, but on employees

with lower wages and on consumers through higher prices. Repeal of the corporate income

tax is a laudable policy independent of the state of the economy and would provide short-
run stimulus for corporations to invest in equipment and innovative strategies by hiring

additional workers to carry out those goals. Since corporations respond to market forces

and not political influence, investments would be more productive than the ones funded by

stimulus projects. By focusing equally on efficiency and stimulus, policymakers can set the

stage for a sustained and healthy recovery by eliminating existing bad policies not just by

adding new layers of government. According to the Seattle Times, “As part of their budget

plan passed last week, House Republicans want to cut the corporate tax rate to 25 percent

from 35 percent [since] reducing the rate to about 5 percent from 35 percent for one year

would lure back $1 trillion to boost the economy.”14 As a result, “The Senate Budget

Committee estimates corporate tax breaks will total about $124 billion this year.” 15

With the current national unemployment rate hovering above 9 percent, corporate

America is on the way of finding a silver lining in the unemployment picture. If the Federal

Government and the Federal Reserve System were to solve the most complicated of all

industrial glitches- argument; not force, generosity; not selfishness, and national interest;

not class prejudice- must prevail to ignite economic tranquility. Each phase of

unemployment must be met by appropriate measures to cap one of the most critical

misfortunes of society. Thereupon, the springs which feed the fountains of national

prosperity and welfare lie in the minds and hearts of the individual.