02/23/2011 12:01 pm ET Updated May 25, 2011

The Essence of Our Current Economic Problems, and the Solution

It is axiomatic that an employed person in the labor force receives compensation and dispenses his earnings for his family's consumption, housing, transportation, medical, education, entertainment, savings and other necessities and luxuries of life. The sum of these expenditures and savings create the cash flow for banks, corporations, markets, investment companies and all of the economic structure of society, however, the building block is employment. If employment falters, the rest will crumble down rapidly. That is where we are at since the current recession that started in 2007.

During the Great Depression of the 1930s, President Roosevelt (FDR) created employment to counter the depression. Eventually it worked and we got out of it.

To address the issue at its core, the Congress of the United States passed the Employment Act of 1946, providing responsibility for the government to maximize employment. However, the Employment Act got stuck with semantics. Maximizing employment was viewed as maximization at given conditions of the economy. Therefore, at bad times maximizing employment could be high unemployment (6% or higher). To rectify this semantic bottleneck, the Humphrey-Hawkins Bill of 1978 was passed.

Given the current economic bottleneck, the main job we have at this point is to add to employment, creating jobs not only for the unemployed but also the underemployed and discouraged workers. That, in fact, is the law in both The Employment Act of 1946 and The Humphrey-Hawkins Full Employment Act was passed, the latter having been signed into law by President Jimmy Carter on October 27, 1978 and codified as 15 USC § 3101.

The current Great Recession which started in 2007 is continuing. It did not end in July of 2009, as claimed by the National Bureau of Economic Research's (NBER) dating committee. The Obama approach thus far is an indirect, roundabout method of coping with high unemployment. It provided assistance to banks and corporations who were expected in turn to stimulate the economy and employment. Obviously the approach is either not working or is too slow for comfort. There is a need o revise the approach and create jobs directly for the unemployed without the middle man. And maintaining full employment of the labor force (94+%) must be the core target of our macroeconomic fiscal and monetary policy, in other words, employment must be considered the basic and most significant unit of economic policy for the short and the long term.

To reiterate, if the private sector is not providing needed jobs then the federal government should be doing so, as the employer of last resort, much as it did in the Great Depression under FDR. President Obama's stimulus program and bailouts have not worked to reduce unemployment substantially, nor has the Fed's stimulative monetary policy including QE2. Many of our other problems of income and wealth inequality, home foreclosures, personal bankruptcies, etc. could be substantially alleviated by significant reductions in unemployment.

Nake M. Kamrany is a faculty member in economics and USC and Michael Intriligator is a faculty member at UCLA.