After five years of hard times, let's face facts. We aren't in a recession in Southern California, we're in a depression.
It's not as severe as the Great Depression, but it's a lot worse than any other economic downturn since the 1930s, and in many ways it seems to be getting worse every day. This is especially true in jobs (200,000 high-paying aerospace and defense jobs gone in five years) and in residential and commercial real estate (which hasn't bottomed out yet).
In my business, I deal with distressed companies every day, and I see firsthand how bad things can get. If the national economy continues to slow, things will get worse in Los Angeles.
To a great extent, our local situation is the result of the Federal Reserve Board's efforts to slow down the national economy by raising interest rates. One result is a prime rate that stands at just below 9%, up from 6% a year ago. This nearly 50% increase in the cost of borrowed money has put many Southern California companies out of business and sent others into reverse gear.
Unfortunately for Southern California, this one-size-fits-all approach to a perceived overheated national economy is the only tool available to the Fed in its fight on inflation. But it's killing off jobs here in Southern California.
What's the solution? Let's adopt a jobs-creation tax credit for high unemployment areas such as Southern California. Although there are many ways to measure the difference between good economic times and bad, the sure-fire litmus test is jobs.
If jobs are scarce or unstable, it makes no difference how low interest rates are, people won't make major financial commitments. Lack of consumer confidence, as we've seen over the last five years, feeds on itself, keeping our struggling economy on the rocks.
On the other hand, if the number of new jobs is growing and current workers feel secure, confidence increases, wallets open and jobs are created.
The now-defunct investment tax credit encouraged companies to modernize plant and equipment. But right now, we need incentives to encourage employers to keep people on payrolls and hire more workers.
Here's how a jobs tax-credit program could work:
When the unemployment rate in a county exceeds a predetermined level--say 7%--for a predetermined length of time--say three or four months--then a federal tax credit of 10% of all salaries and wages paid in that area would kick in. This would encourage employers not to lay off workers, and it would act as a magnet for jobs from other areas where the tax credit is not available.
For example, in some Midwest cities, the unemployment rate is below 3%, and companies are stealing workers from one another by bidding up wages (and raising prices). A jobs tax credit would encourage those companies to farm out work to Southern California companies or even set up operations here, reducing unemployment here and inflationary pressures there.
This credit would be applied to each eligible company's federal tax liability. A company with a million-dollar-a-month payroll would get a $100,000 tax credit for each month, to be deducted directly from its next payment of federal income taxes. Companies operating in the red would be able to sell their tax credits to profitable companies. This would encourage lame companies to stay in business until they become healthy again.
For this tax credit to be effective, it would have to remain in effect at least two years. That's long enough to encourage the desired behavior by employers.
All well and good, you might say, but wouldn't this reduce tax revenues and worsen the deficit? No. First, such a program would move people off the government's unemployment dole and put them back on the job as taxpayers.
Second, it would target governmental help where it is most needed instead of spreading it out over the entire nation. That's the Fed's problem. If it cuts rates to boost Southern California's sick economy, economically healthy areas will almost certainly quickly overheat, which will cause the Fed to again slam on the brakes and probably make things here even worse. Remember, all economic activity, including tax revenues, can be traced back to payment for work.
Jobs should, after national defense, be the nation's No. 1 priority. Jobs are the foundation of an economy, a society and a nation. Jobs are a key reason people flocked to Southern California in the first place and stayed here. A federal jobs-creation tax-credit program will cause them to remain, building our economy and society.