March 6, 2010, 07:23 AM ET

Capitalism's Little Secret

February's job growth was another bust. The U.S. economy lost 36,000 jobs last month -- to keep up with the population growth the U.S. economy should be adding something close to 130,000 jobs. There are six people looking for jobs for every job vacancy.

What can we do to create more jobs?

Raising unemployment-insurance benefits -- a New Deal program that for political reasons rooted in Southern racial politics are state based rather than federal -- is the best way to create jobs dollar for dollar (see the Congressional Budget Office's recent report). The economics is simple. A dollar going to an unemployed person is immediately spent, propping up the tailor, butcher, and electricity maker, and, both poetically and paradoxically, a government program that helps the unemployed reduces the number of unemployed.

Should I repeat that? It's cool.

Unemployment insurance cures that which it insures.

UI is an automatic stabilizer. In bad times, government payments are quickly put into the hands of consumers and in good times tax increases slow down an expansion. But in the last expansion, states either cut UI tax rates or didn't raise them enough and since state constitutions ban deficit spending, states have limited ways to fight recessions and it is only going to get worse. Already 31 states have borrowed from a federal fund to pay UI benefits - nine more are expected to -- and Congress has extended UI benefits for the long-term unemployed already five times -- since this recession and the last increase was at the mercy of Republican Jim Bunning who held up payments for four months.

The new Republican governor from New Jersey is asking for big and activist government aid by requesting that NJ's loan be forgiven which would make the loan a big grant to the state. I agree with the gist of Republican Chris Christie's request. But federal recession aid to states has to be quicker, avaliable to all states, more transparent and accountable (see this from the Ford Foundation). It is good Congress finally exended UI benefits the fifth time this recession but we should permanently federalize and reform UI insurance so that it works faster and more effectively. See this from Heather Boushay at the Center for American Progress.

The great irony embedded in so-called "free" markets is their dependence on activist government policies.

Always have, always will.