Will A Jobs Credit Create Jobs and Save Democrats?
Just abut every conversation I’ve had with a Democratic elected official or staffer in the past few weeks came around to the same urgent question. And, no, it was not about health reform. It was about jobs. When, they ask with more than a hint of panic in their voices, will the jobs come back?
These lawmakers, with an uncanny instinct for political self-preservation, recognize that 10 percent unemployment this time next year will be an electoral death sentence. That’s why they are increasingly talking about the need for a new economic growth package. White House aides, who have been fueling the fire, insist this won’t be a new stimulus, just an extension of an old one.
Semantic sleight of hand notwithstanding, such a package would mean hundreds of billions of dollars in new government spending and tax cuts. Some will be aimed at boosting demand (extending and expanding the home buyer tax credit), some will be essentially humanitarian (extending unemployment benefits), and some will be explicitly intended to encourage hiring (an employment tax credit).
I’ve written recently about expanding the housing subsidy—a singularly bad idea. But it has been a while since TaxVox looked at the jobs credit. My post last January set off a fascinating debate about the benefits of a similar effort in the Carter Administration. The consensus: About two-thirds of the 2.1 million jobs created by the Carter credit would have been produced anyway.
Tim Bartik and John Bishop, both of whom have written extensively on Carter’s New Jobs Tax Credit, argue it nonetheless created 700,000 new jobs in a year—not bad, even if a lot of money was wasted. Others insist the research they used is flawed.
President Obama’s updated version died in last winter's stimulus debate amidst questions about its cost and design. Could he retool the plan for a Stimulus Redux?
There are lots of questions. Is the original $3,000 credit enough? Is it prudent, given a $1.4 trillion deficit, to make it more generous? Should it be refundable? If so, at least some of the money will end up in the hands of businesses that are doomed to fail (haven’t we done enough of that lately). On the other hand, why should a deficit-ridden government subsidize profitable firms that would be hiring anyway?
The most interesting issue may be timing. In the depths of the slump last January, it was hard to imagine businesses hiring, even with a credit. Now, as the economy recovers, are employers closer to rebuilding payrolls? Would a credit now tip the balance? Is all the chatter about a new credit perversely delaying some hiring?
In a very nice story last week, Lou Wilin of the Findley Ohio Courier asked employers in his hard-hit state whether the credit would encourage to them to hire. Overwhelmingly, they said no: “People do not staff plants based on tax credits,” said Jed Osborn, plant controller for Ball Corp. “You just do not hire people to stand around,” Osborn said. “They have to have a reason to be there.”
That’s why my preference is to let the first stimulus run its course (at least 60 percent has yet to be spent). That should boost demand for goods and services which, in turn, should revive the job market. The most important long-term step Washington could take may be to fix the health insurance system—currently a huge disincentive to hiring new workers.
Unfortunately for rattled Democrats, repairing the fundamentals will take time. And I understand why they don’t want to wait. But a jobs credit isn’t going to save them.
I'm a little concerned about your logic at the end of the post, when you quote Osborn. His point is trivially true. The idea isn't to hand out jobs where they're not needed – the idea is to change the marginal cost of labor to make a worker that is marginally not worth hiring worth hiring. It's not about handing out jobs to people who stand around.
Would you offer criticism of the EITC on the same basis, I wonder? Certainly some EITC recipients would have supplied their labor in the absence of the EITC. Does that make it a bad policy? Do we complain that those workers are just getting paid to stand around? Of course not.
The only objective of a Jobs Credit is that the public gives the politicians credit for their jobs.
Howard:
Several points:
1. I don't see why your statement that the consensus is that “[a]bout two-thirds of the 2.1 million jobs created by the Carter credit would have been produced anyway” is an argument against reviving a NJTC. If that statement is true, and a $7,000 credit can induce one out of three jobs subsidized, than a revived NJTC only costs $21,000 per job created. This is cheap compared to both social benefits from job creation in a high unemployment economy, and compared to the costs per job created of other fiscal stimulus measures. Any tax credit is going to go to some activity that would have occurred anyway. The relevant question is whether the actually induced activity has sufficient benefits to justify the costs.
2. Regarding the Findley Ohio story, the fact that many employers will not respond to a jobs tax credit is not a good argument against reviving the NJTC. Obviously, if there are no prospects for a business making money from adding jobs, then lowering its wage costs from expansion with a credit won't work. (And of course the wage credit would have zero costs for that employer, as the employer will not expand.)However, in any economy there is an enormous diversity of employer situations. Tax credits work best on the margin of decision-making. There are some businesses that do have some reason to think that they could sell more if they could expand, but their expansion may only be profitable if net wage costs are somewhat lower. A tax credit only needs to affect a small percentage of business decisions to have significant effects on job creation.
3. I believe that some of this debate rests on underlying assumptions about the magnitude of the social benefits from job creation during a recession. I think the evidence suggests that these social benefits are quite large. This suggests some urgency to the situation. Your comments on this topic suggest that you do not perceive the same urgency.
4. I perceive some distinction between public finance economists and labor economists on this issue. A simple and efficient tax system is a worthy goal. But there are other important social goals that may justify adding some additional complexity to the tax system.
Tim Bartik
The best stimulus is to increase the Child Tax Credit, paying for it by ending the child exemption and the home mortgage interest and property tax deductions. This will likely increase housing, since as you have said in the past, the rich buy second homes anyway. If that is not true, it will only change the mix, since when people have more kids, they get expanded housing if they can afford it (even if it is rental).
Expanding the credit beyond what is paid for will also be good stimulus, especially if it is made refundable.