June 2, 2010 - It seems all the news is bad. The little it of good that's out there is quickly dismissed as something bad overwhelms it. Every day, something new, something bad. As Roseann Roseanna Danna used to say: It's always something.

Unemployment was close to 27% with over 1 in 4 workers out of a job. Other countries saw the jobless rate hit 33% or more. Construction stopped cold. Crop prices fell 60%. In 1930 there was a severe drought, ravaging the agricultural states in the heartland. Interest rates plummeted, but nobody borrowed money. Investors got hit hard beginning in 1929 when Black Tuesday dropped the market precipitously, shocking everyone. Auto sales in 1930 were below 1928 levels. Prices went lower on all commodities with farmers raising crops that were better plowed under than harvested. Deflation was the expectation, and when consumers didn't spend, deflation became a reality. Politicians got into the act, passing the Smoot Hawley Tariff Act, meant to protect American manufacturers, and other retaliatory tariffs, only to make things worse. It all reached a bottom in 1933.

In disecting the Great Depression, one scholar, Irving Fisher, opined that loose credit and over-indebtedness were the main cause and when the asset bubble burst, bad things happened: distress selling, lower asset prices, fewer loans made, lower levels of net worth for businesses which caused bankruptcies, lower profits, reduction in output in trade and employment, pessimism ruled, money hoarded. Sound familiar?

By 1933, in the spring, the United States began a recovery. But not a sharp or fast one. By 1940, unemployment was still at 15%. Scholars debate exactly how the recovery happened. Many attribute President Roosevelt's New Deal programs as the answer while others believe it was the natural course of business cycles since the New Deal was never aggressive enough, by itself, to bring the economy completely out of recession. Other scholars suggest it was monetary policy. A favorite of now Chairman Ben Bernanke. What really made a difference was World War II, where factories were turned into manufacturers of weapons and warplanes, tanks and fatigues.

While the answer to our problems is really the same as it was in the Depression, the way to go about it is different. The answer, of course, is jobs. It's the whole answer. Don't look any further than that. Jobs. Lots of jobs. When people have jobs, they buy more things, pay more taxes, have a more optimistic outlook. It's that simple. It's not political. It's economics.

So how do we create jobs? We give businesses incentives to hire people by lowering their taxes. Instead of paying taxes to the government which makes up jobs that don't add value to the economy. That merely puts a band aid on a fever. It's the wrong treatment for the problem. By lowering taxes, business have an incentive to hire more people to make products or offer services that consumers want. (And those new workers pay taxes.) If consumers don't buy the products or services, then the invisible hand of Adam Smith will quickly descend and encourage those businesses to do something else or close. Cruel but necessary.

The government shouldn't help the worst businesses out either. Let them fail because propping up a bad company doesn't usually make it better. Yes, failure increases unemployment for a while, but that's better than dumping more stuff into the market that no one wants. The same goes for financial institutions. If they make bad loans, they're not smart enough to be a bank. If they make bad investments, they don't deserve to be an insurance company. Again, cruel but necessary medicine to cure the current problems.

The point here is that Americans will move the pendulum back toward the middle. It's been pushed so far to the left with large amounts of expenditures and very little reward that Americans will be looking for other answers. The current one is not working, needs to be changed. Focus on jobs. Make that the national priority, and everything else good will follow. It will happen, eventually.

Investors need to watch the upcoming elections. If more politicians that focus on jobs are elected, expect the market to start a recovery. When final legislation is passed, and it actually encourages business to hire people, the market will do even better. However, if politicians are elected that hold to the current thinking of throwing money at the problem, look out below.

- Ted Allrich