Thursday, March 18, 2010

The "Jobs Bill": Democrats Continue to Fail the Unemployed

President Obama signed a bi-partisan "jobs bill" this week, the centerpiece of which is a tax credit to businesses who hire unemployed workers. The $13 billion credit will allow businesses to avoid the 6.2% payroll tax that goes to the Social Security trust fund as long as they retain the worker for at least one year. The Democrats are patting themselves on the back for turning their attention to jobs and the economy. They are claiming this as a policy victory and a political victory. It is neither.

Businesses hire workers all the time. The net gain or loss of jobs each month doesn't reflect the much higher numbers of gross hires and gross fires. Many companies will hire workers regardless of the tax credit, yet they will receive the tax credit all the same. The idea behind tax credit is that it makes the cost of hiring workers temporarily lower (by 6.2%), inducing businesses to hire more workers than they would otherwise. According to its proponents, this should make up for the cost of paying the tax credit to employers who would have hired workers anyways, such as for seasonal positions. Theoretically this makes sense. However, the problem is, as my favorite economist Dean Baker aptly notes, that in the real world businesses' employment practices don't always change in response to the cost of labor as theory anticipates.

Baker cites several studies, ironically by several economists now in the Obama administration, showing that raising the minimum wage does not reduce the number of workers hired as classical economic theory predicts. He connects those studies to the effect of reducing the cost of labor as opposed to raising it:
If raising the minimum wage by 15-20 percent doesn't cause employers to hire fewer workers, then there is no reason to believe that cutting the cost of labor by 6.2 percent will lead them to hire more workers. There may be some substitution with longer term unemployed being hired instead of new entrants as a result of this tax credit, since it would only apply to people who have been out of work for at least six months, but it is just silly to imagine that it can have any noticeable impact on employment.
Furthermore, the hiring tax credit does not require a company to increase its payroll on the whole. So a company could drop one worker and hire a new one at a lower cost. Likewise companies can game the credit by hiring as employees people that were formerly contractors, which doesn't add to aggregate employment at all.

If it increased employment as advertised, this tax credit could be viewed as Keynesian public investment to stimulate still-lackluster aggregate demand and create growth. However, Baker's criticisms suggest that it might be more of a supply-side tax cut for capital. Without strong consumer demand, simply bolstering companies' balance-sheets with taxpayer money won't create the investment we need for sustained growth, and diverts public funds from potential projects that are much more effective such as infrastructure building and repair and direct job creation like in the New Deal.

The Democrats' next proposal for jobs demonstrates that they might be fine with that. The NYT article on the "jobs bill" says that up next is a proposal to extend corporate tax breaks. Wait, what party is in power again? It can't be the party of FDR, can it? I can't wait to hear them try to spin corporate tax breaks as a "jobs bill."

I suspect the public will remain skeptical that their government is doing its upmost to improve the employment and overall economic picture. If the hiring tax credit fails, it will come off as just another government intervention to benefit capital i.e. the wealthy, e.g. bank bailouts.

A better alternative would be major public investments. The "jobs bill" does transfer $20 billion to highway projects, but the NYT article suggests that those funds have just been transferred from elsewhere, meaning there will be reductions in spending elsewhere. We need NEW job-creating investments, and as long as we can fund our deficit at such low interest rates we might as well borrow to do so. Also there are much better alternatives than road building, such as investments in a modern high speed rail network, home retrofits, and wind and solar energy capacity. Not only would smart public investment be better for the economy than business tax breaks, but it would create real, tangible jobs plus public benefits that the Democrats could point to as evidence of good policymaking.

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