An Example of Economics at Work

I’ve stayed out of politics this fall, but a comment on Obama‘s new economic proposals is a good teaching device.

He has proposed an income-tax credit of $3,000 for each new job above a company’s current employment level in the next two years.

We did something very similar in 1977, the New Jobs Tax Credit (N.J.T.C.), and it illustrates economics at work.

Unlike inefficient subsidies that provide funds for an activity that would have been undertaken anyway, this kind of marginal tax credit only subsidizes new activity. The benefit per dollar of credit is greater with this approach; it is more target-effective.

Indeed, a number of studies evaluating the old N.J.T.C. suggested it had substantial effects in stimulating employment.

Moreover, the jobs created especially benefited low-wage workers: not surprisingly, since the cap on the credit per worker made it a more attractive percentage subsidy for hiring lower-skilled, lower-wage workers.

Theoretical work suggests it is especially likely to be successful in an economy that is sliding further away from full employment, as we now are.

(Full disclosure: I was one of several who worked on this proposal in the mid-1970’s; like all the others, I take a lot of credit for it. The old saying “success has 100 fathers, failure is an orphan” is relevant here.)


Philip Graves

I confess, this makes no sense to me!

Doesn't this essentially feed the system artificially by encouraging short term employment? Shouldn't a position in a company exist entirely on its merits?

Inevitably, human behavioris such that some people will take up the 'offer', in much the same way that some people will buy a cheaper brand of powdered milk and inadvertently poison their children: that's just the way it is.

Surely, if taxation is to be reduced it should be across the board, thereby making all employment potentially more cost-effective.

david moore

Where is the logic?

Tax breaks to people who do not currently pay taxes, why would this be a bad thing, what logic would dispute that it is? Would this not only reduce and diminish the amount of taxes, currently, not paid, by those who do not, currently, pay taxes? The less, currently not paid, is a good thing, Right?

RJ

What about a tax fee for laying off employees. Essentially trying to balance out the tax costs of keeping someone employed therefore a company would have to weigh the tax cost to laying someone off vs the tax cost of keeping them employed.

sanchmo

Devin, nobody pines "for a government that takes no effective action." We pine for a government that stops taking ineffective action. It would be oh so easy if congress could just pass laws that eliminate opportunity costs and dictate how individuals behave as they try to do good for themselves and their femilies. Instead we've had a century of failed price and wage controls, failed trade restrictions and failed redistribution programs. And when a $1-Billion program doesn't work, the answer always sems to be to increase it to $10-Billion.

I would prefer that congress take $1-Trillion in cash, put it in a big pile, pour gasoline over it, and light it on fire. That would be more "effective" than most of their hair-brained schemes under both parties.

Norm

echoing #27 htb a bit. I'd like to know how commonly small business owners have more than one corporation? In high school I worked for two "businesses" One paid federal minimum wage and imported stuff. The other, paying state minimum wage unpacked and labeled for sale in state the stuff that had briefly been touched by the first business. Same bosses for both.

I fairly frequently deal with people who own more than one business and seem to change between them as is convenient. Can't these people claim credit by shifting jobs to one or the other entity? Are there enough of them to make an effect on the results of the program?

Matthew

For the posters suggesting an employee would be hired and then let go once the required period ended, it is probably that this is going to have some kind of prorating factor. I used to work for a company that calculated Welfare to Work and Work Opportunity Tax Credits for firms and the government set these up to ensure that the employee would be somewhat entrenched before all the money would be paid out.

Leon

This makes zero sense.

Get this: we're in a global economy that is sucking air right now. Companies are laying off employees in droves...not to mention sending jobs overseas to business-friendly countries. So a simple $3,000 tax credit is no incentive considering the cost of creating a job (advertising the job, potentially using a search firm, managers' time interviewing, training the new employee, etc.) is, very conservatively, $5,000 or more. This may work somewhat with bottom wage-earners, but not at all with the type of mid to higher paying jobs we want in our fragile economy right now.

TonyD

Every time I see arguments revolving around market efficiency I just cringe.

My quality of life only vaguely correlates to market efficiency. (In fact, it may vary inversely to market efficiency. I suspect that as wealth increases the relationship becomes more directly proportional.)

Steve789

OK, so tax breaks for business are bad, but hiring incentives are good, so long as they are paid for by increasing taxes on business??

Or do we pay for them just by printing more money thereby increasing inflation??

My pants are only half smart, so I need some education, please explain.

As for #30, nobody pines for an inept government, I'm sorry your exact word was "ineffective," we pine for an 'unobtrusive' one. Further, I would think that with as many government rifles on as many street corners as I think they have in Iraq, that were I living there I would call it 'OBTRUSIVE' regardless of it's effectiveness.

You apparently equate the words action and effective into one collective meaning.

Bruno

It seems that quite a few commenters do not understand the difference between a "Tax Deduction" (the one you're referring to) and a "Tax Credit"

A 'Tax credit' of $3000 if worth a lot more than you think if it was a mere 'tax deduction'.

You don't take that off the gross, but off the taxes you're otherwise going to pay.

Big difference

Anca

As a small business owner who is about to add an employee, the tax credit would help me hire someone with less experience and train them to the point where they would be productive.

Even a recent college graduate needs a little experience and steering in the "real world". Productive local businesses like mine can create real benefits in a community, including new tax payers who would be instead living in their mom's basement.

steve

This was briefly mentioned, but wouldn't any employment added because of this plan be negative? Of course, there will be more employment as many firms will not even consider the 3,000 in their hiring process. But if it did affect my business, why would I not make a full-time job two part time jobs? Or at the very least 3/4 time. Wouldn't I have an incentive to hire an employee and see to it that they immediately quit? I honestly cannot see how this plan would work.

Devin

Just a simple suggestion that would fix two big problems at once. Many people on here pine for a government that takes no effective action and doesn't interfere with economic activity. As a nation we're spending outrageous sums of money to keep troops in Iraq to maintain order since the government would presumably be ineffective in their absence. Why don't we send all the people who demand government stop trying to solve problems to Iraq and bring our troops home. Our country saves tons of money, our troops are out of harm's way, and the people who want to live under an ineffective government get their wish. Simple.

Cluny Brown

I'm in favor of the $3000 incentive as long as there are firm ground rules. The jobs created must be full time--i.e. 35 hours per week or more if hourly, and the equivalent for salaried positions. The job must exist for a set period of time to discourage taking the money and dumping the employee at year end.

In typically low wage industries like retail, the trend is to convert all workers to part time while demanding a flexible availibility that often precludes having another job. Eventually, most of the workers are people supported by a spouse, parent or government [whether Social Security or welfare]. But for anyone else--it's impossible to be a self-supporting worker in today's retail climate where managing expense has become as important as generating sales. The race to the bottom to weaken wages and benefits has affected most service industries.

There is no way for workers to win, except to go elsewhere, leaving behind a staff of poorly motivated, underpaid people who are the least qualified to encourage a customer to return in the future. But it's ironic that the same soft economy that kills sales brings in a better class of workers who are desperate for jobs.

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Mitchell

I haven't read the comments and I'm sure you all have great things to say. But the only response to this idea is short and sweet:

GOVERNMENT HAS NO BUSINESS DOING THIS. GET OUT OF OUR LIVES AND STOP TRYING TO "IMPROVE" THINGS.

If the presidential candidates and other elected officials want to do something to stimulate the economy they can repeal about 90% of the legislation they've passed over the last 220 years and then go home. That's a party platform I can get behind and support.

Matt T

"There’s got to be some sort of inefficiency created by government interference in a non-failing market" from Bobby G. This has to be one of the great fallacies of modern thinking.

ALL participants in a market influence the market to their own ends, introducing inefficiencies. Each participant will only expose as much information about their position as they wish or are forced to.

You only have to look at the obvious example of mature industries that are ruled by a few large operators. The risk the operators face in trying innovation etc is higher than that of protecting their market.

Simply stating that any government intervention is going to create inefficiency has been proven false many times and is just hawked around by lobbyists of special interest groups.

The trick is to find intervention that forces the market to act efficiently (if it is not already) which is why I am not sure this particular example is good.

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htb

Kathy A in #13 is on target. It isn't going to create high-paying jobs. ($3K is just 2% of a senior software engineer's pay+benefits here in Silicon Valley.) But if you're already paying $15,000 a year to hire a minimum-wage janitor through a janitorial service, then you might well decide that paying net $12K to hire the person directly is a good idea. The actual person cleaning the business might even end up with a small pay raise as a result.

This would likely also encourage a certain amount of consolidation, as you decide that taking over a closely associated business could count as "creating new jobs". In this instance, I'm primarily thinking of the "his and hers" model of family businesses, wherein she owns an interior design business and he owns an interior construction business, and the two "separate" businesses just happen to only work with each other. "Closing" one and "expanding" the other gives the family business full credit for "creating" half the jobs that already existed simply by doing some paperwork.

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Don

You're taking credit for a portion of the economic policies of the Carter Administration? Cool!

Scott Wentland

Basic micro tells us that this distorts capital & labor substitutions (as you know), toward a less efficient equilibrium. I have no doubt that it will achieve its desired result of more employment, but there are a number of other policies that achieve that result with a similar cost to economic growth and efficiency.

A tax on new capital should induce the same sort of substitition by making new labor relatively more attractive. This should be particularly true for many low wage jobs where labor and capital are more easily substitutable.

Governments around the world have shown that employment is a policy area where they can successfully intervene (e.g. the Soviets had full employment), but often at the high cost of economic growth and productive efficiency.

Ken Francis

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