Jobs, Jobs, Jobs

With nearly one in ten American labor force participants out of work, it is clear that more needs to be done to stimulate hiring. Action is required, and I’m pleased to add my voice to those calling for a well-designed temporary hiring tax credit. This proposal has earned the support of 21 leading economists, including folks who are often on very different sides of economic debates.

Alan Blinder has a useful article in last Friday’s Washington Post, explaining the logic of the hiring credit. Here’s the key:

The search for a cheaper way [to raise employment] leads to policies specifically targeted at job creation. The two main options are direct public-service employment and a new-jobs tax credit. The Obama administration and several members of Congress have proposed the latter. If most of the new public-service positions are low-wage jobs, and if the tax credit is designed well, the per-job costs of these policies are comparable: $30,000 to $40,000. I would recommend doing both, targeting roughly a million new jobs with each program, at a budgetary cost of perhaps $70 billion. While 2 million more jobs won’t end America’s gaping shortage, it would make a significant dent.

Those numbers are important: Adding two million jobs, with a fiscal impact of less than $250 per American. With so many people out of work, it’s the least we can do.

And here’s another idea I would like to see taken seriously: wage subsidies focused on the long-term unemployed. I’m worried that these folks are going to find it difficult to get back to work even when the economy starts to gather steam. If the long-term unemployed lose skills, or lose touch with the labor market, there’s a chance that inflationary pressures may develop even when the unemployment rate remains high. The best way to prevent inflationary pressures from developing is to ensure that all workers remain job-ready.

The full letter-sent to the Congressional leadership of both sides-is below the fold:

Dear Speaker Pelosi, and Messrs. Boehner, Reid, and McConnell:

A great number of different policy actions–including the American Recovery and Reinvestment Act, the financial rescue, and the extraordinary monetary policy measures taken by the Federal Reserve–have in their sum played an important role in changing the trajectory of the economy from one of terrible decline to one of growth. But with the latest unemployment rate at 9.7 percent, it is clear that additional emergency policy measures to jump-start job creation are still warranted.

A well-designed temporary and incremental hiring tax credit is a cost-effective way to create jobs, and could work well in the current environment. At a time when GDP is beginning to rise and demand is starting to return, private firms are likely to respond to such a tax incentive by hiring sooner and more aggressively than they otherwise would have done. Such a credit could thus help put Americans back to work more quickly than otherwise. And by targeting firms that are growing, such a tax credit supports the businesses most likely to lead the recovery of employment.

There are many ways to design an effective hiring tax credit, but in general the beneficial effects will be greater the stronger the hiring incentives and the lower the administrative burdens placed on firms. It is critical that such a tax credit be put into place quickly and that it is publicized widely. Firms will begin to accelerate hiring only when know they can count on such tax relief.

We judge that a well-designed hiring tax credit is a well-targeted and economically sound strategy for aiding job creation at this phase of the recovery, and so we support a well-designed hiring tax credit.

In our personal capacities, we are sincerely yours,

Mark Zandi
Justin Wolfers
Laura Tyson
Mark Thoma
Peter Temin
Joseph Stiglitz
Betsey Stevenson
Isabel Sawhill
Dani Rodrik
Robert Reich
Richard Portes
Larry Katz
Barry Eichengreen
Peter Diamond
Brad DeLong
David Cutler
Robert Cumby
Tyler Cowen
Menzie Chinn
Alan Blinder
George Akerlof


Andrew McKenzie

When you say "temporary hiring tax credit", Dr. Wolfers, do you mean that the tax credit is temporary, or the hiring is?

Brett

So let me get this right... because we've got such high unemployment, I should be forced to pay $250 to give someone else a job? What about when there is only 3% unemployment, are those people less worthy of my $250? To a guy without a job, there's little difference between 3% and 9% unemployment (the only difference being competition for new jobs).

I have a much better idea to stimulate hiring. Let's cut government spending drastically, which means taxes can be cut almost as drastically, which means Americans have more money to spend, which means businesses will need to hire more employees.

The three differences between your solution and mine is that mine is (1) long-term and (2) strengthens freedom by minimizing government.

Why must a response to a crisis be more government when less government would be more effective and more logical (dead-weight loss anyone)? I'm all for helping people who are less fortunate than I am, and I donate to charities regularly in excess of $250 - in other words it's not the money that bothers me - what annoys me about this solution is that I'd be FORCED to pay the money.

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Brett

Note: two differences - not three...

DaveyNC

I have a better idea. Instead of a temporary tax credit, how about a permanent tax cut?

Companies aren't hiring right now because they are uncertain about what the future may bring. They won't make a long-term commitment to an employee based on a short-term gimmick. It feels like a trap. You are offering to tempt businesses into taking on additional costs absent a compelling demand-driven need to take on those costs.

Just as Cash for Clunkers displaced demand for those cars to an earlier decision, this tax credit proposal will only benefit those companies that are going to hire someone anyway.

This proposal, as was the stimulus and Cash for Clunkers and nearly every other Keynesian notion that is dribbling from the maw of Washington is little more than an attempt to goose the economy back into an existing tax and spend structure that is both broke and broken. Structural changes are needed, not this sort of nibbling at the edges junk that you are offering. The size of the federal government needs to be reduced and the costs associated with that need to be returned to the people.

President Obama and the DC crowd need to stop treating companies and citizens like their own personal piggy bank and try to remember that the money that they are tossing around so cavalierly does not belong to them, it belongs to us. For crying out loud, I just learned that Obama's so-called plan for health care reform adds taxes on investments, rents collected, and nearly every other financial gain that an American citizen might produce for themselves. It's like Obama believes that our highest calling as American citizens is to send money to him so that he can spend it as he sees fit. Enough. Leave us alone and get the hell out of our way.

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Mark

I'm a Freakonomist, but I have to whole heartedly agree with the first two comments. Really not much more to add.

Pete

Rationale based on "cost per American" is ridiculous, and I would not expect in a serious economic analysis and should have no bearing on the merits of any idea.

Is there some analysis behind this that says that 250/American is a good investment for the government? If so - can you maybe share some of it?

Community member

@Brett - I think you're missing the point. We're not getting people jobs so that they have a job. The job growth is to help the health of the economy. The $250 per tax-payer cost is mentioned in absence of any implied costs that may exist. For example, is the poor state of the economy preventing every tax payer from getting a $250 raise? I'd say so.

You say you have a "much better idea" meaning, I assume, one you like better because of personal preferences and idealogical attitudes. I'm going to go out on a limb here and say that the list of economists supporting this proposal are supporting it because it seems likely to WORK and not because it matches the way they'd LIKE things to work.

I hope I'm not just feeding the troll here...

Rudiger in Jersey

We should have a policy to encourage wealthy entrepreneur immigrants. If you can prove net worth of One Million Dollars and agree to start a business that hires FIVE employees THEN you are given a fast track immigration. We need people who want to start businesses, have capital, have specialized skills and education and have good work habits that can benefit our economy and make us comptetitive. Not everyone can or has the skills to start a business...it is less than one percent of Americans.
Canada and Australia already have this policy successfully implemented; we should be bold.

M.B.

Do we never learn from what got us here in the first place? This situation was caused by too much government meddeling (ie. pressure to lend to the uncreditworthy). A better solution get government out of the way. Unintended consequences anyone?

Brett

@Community member

Definitely not a troll, I'm quite genuine in my thinking here, even if you disagree.

"The job growth is to help the health of the economy."

- Tax cuts would would spur job growth and help the health of the economy as well.

"The $250 per tax-payer cost is mentioned in absence of any implied costs that may exist. For example, is the poor state of the economy preventing every tax payer from getting a $250 raise? I'd say so."

- I genuinely don't understand your point here. The way I see it is: Poor economy = lack of raise; solution = stimulate economy; method = higher taxes to cover a tax credit OR lower taxes overall. In this situation, I'd say lower taxes is a clear winner.

"You say you have a "much better idea" meaning, I assume, one you like better because of personal preferences and idealogical attitudes."

- No, by "much better idea" I mean a "much better idea" overall. Basic economics discusses dead-weight loss incurred by taxes, it's also well known that government is not as efficient as the private sector; thus decreasing taxes and decreasing the involvement of government in the changing-hands of money provides a greater economic outcome.

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Craig

Tax cuts will only work if the government ALSO cuts spending. Tax cuts without spending cuts is what got us our Trillion-dollar deficits.

Of course, cutting spending is hard, since the majority of the spending is non-discretionary (eg: Medicare, Social Security, Medicare) or Defense, and there aren't enough politicians in the House, Senate, and White House with the balls to actually cut spending in these areas. If there were, we'd already have healthcare reform, tax reform, and, dare I say it, actual leadership from our so-called leaders.

Ben

Let's crunch the numbers a little more, shall we?

$30,000-40,000 per job. Using the 250/per american number, that comes to $37,500 per job created. Most of these jobs will be 'low wage,' which one can assume to mean under the median American wage, currently hovering around $40,000.

This means the government will be paying $37,500 per job to create a $35,000 position! With no guarantee that these jobs will last longer than the credit. This is essentially a way to hand money to businesses, who then would hand *less* money over to their employees.

The government needs to stop giving away money, particularly to businesses.

Daniel

I wish I knew how to encourage jobs ceation (see front page link).

George Edward Baxter III

While it is true successful Americans should receive tax relief and not have to pay for others irresponsible behavior I think there is a much more simple solution to unemployment among the common man. Abolish the draconian minimum wage law! The average laborer is desperate for work but how can he compete with a Chinese or Bangladeshi worker who is able to set his own wages? If the employers had the freedom to hire a worker for two or three dollars per hour we would see employment skyrocket in this country! Also we wouldn't have a need for transfer payment banditry like social security if we allowed children to work at a younger age. I say give American youngster the freedom to enjoy the fruits of his brow sweat! Suppose a hard working young fellow begins a job working fifty hours per week at two dollars an hour. If he saves just half of his money he could already have retirement savings of $25,000 by the time he turns 20! But I ask you my friends, how many of the American poor really have the discipline to do that? Very few I would wager.

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LAS, Redmond, WA

What about strengthening and actually enforcing the laws against age discrimination? The government shouldn't have to bribe employers to hire older workers. Older workers often have superior experience and qualifications for the jobs they apply for. The idea that older workers do not know technology is a myth. People apply for jobs that match their qualifications. Unless the hiring of older workers is faced directly, unemployment in this sector will continue, subsidies or not.

LAS, Redmond, WA

Subsidies are not a substitute for linking the H1-B rate to the unemployment rate in the high tech sector.

catherine

Tax cuts are indeed one way to stimulate the economy, but they are not the most efficient way. Economic analyses show that tax cuts are largely pocketed and do not return to the economy. Spending on things like infrastructure is one of the best uses of stimulus. These proposals to make it less expensive to hire people are somewhat of a middle path.

To those here who advocate "less government" - could I direct you over to Paul Krugman's column today? When you get back, would you please tell us just how you would cut government spending, with concrete examples? Thanks.

Robert

I suspect that a certain company which has expressed great interest in hiring me is postponing the decision to do so because they're holding out to see if they will get a tax credit.

Brett

@Craig

Agreed 100%, in my original comment I put a cut in government spending first on the list.

"Let's cut government spending drastically, which means taxes can be cut almost as drastically..."

If spending is not cut, then taxes can only be cut temporarily.

Alex

Couple things regarding previous comments.

First, $250/American is indeed a disingenuous way to look at government stimulus, particularly since the vast majority of tax revenue is generated by a very small portion of wage earners. In effect, all government subsidies and stimulus are a form of wealth distribution from the have (a whole, whole) lots to the have nots. If you're middle or low income, you might pay $30-40 of that $250, while someone with high income pays $460-480 to compensate.

With that in mind, it is not enough simply to cut taxes and reduce dead weight loss incurred by taxation, since that only views the goal of fiscal and monetary policy as expanding the total size of the economic pie, rather than ensuring that it is more evenly distributed.

Most economists acknowledge that taxes create disincentives for work, but the actual rate on the margins is pretty low. Reducing taxes by 10% is not going to cause workers and businesses to work 10% more, particularly if the business is already making obscene profits that go well beyond any economic necessity to spend.

Ultimately, the government needs to spend during a recession to ensure that those who are under and unemployed are still involved in economic life and that we are not subject to the whims of the private sector's spending habits -- which is what tax cuts do.

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