Monday, February 1, 2010

America needs jobs, not tax credits

The Baltimore Sun points out that fixing the nation's crumbling infrastructure would create more jobs and economic growth than President Obama's proposed $5,000 per job tax credit.

The editorial is linked.

The Atlantic Monthly's Richard A. Posner also weighs in:

The program is unlikely to have an appreciable effect on employment. It is too small. It will either be gamed (as by firms that fire and then rehire), or the procedures created by the legislation to prevent gaming will entangle the program in red tape, delaying its implementation and perhaps rendering it largely ineffectual, like the program to encourage mortgage modifications. It will not be targeted on industries and areas of the country in which unemployment is highest.

But the biggest problem with the job-subsidy program is that it is fundamentally misconceived. The Keynesian theory of stimulus (the only theory that makes economic sense) is that if private demand for goods and services falls substantially below the economy's productive capacity (as it has done), government can replace the shortfall in demand by increasing its own demand. It can buy roads and airports and military equipment with borrowed money (so as not to take money out of people's pockets, in the form of taxes, and by doing so depressing private demand). And it can borrow cheap, because consumers are saving more than usual, and with demand weak, businesses are borrowing less than usual. So the private demand for credit is weak, and interest rates therefore low. The surge in government demand increases production, and increased production results in increased employment.

The job-stimulus plan is not aimed at increasing demand, and therefore is unlikely to increase employment. For example, if a company is producing 1,000 widgets a year with a work force of 30, and it adds a 31st employee and thereby earns a $5,000 tax credit, the company's total costs will have risen by the wages and benefits that he pays the new employee minus the $5,000. But his sales will not have risen. Participating in the job-subsidy program will actually reduce his profits (revenue minus cost).

The job-subsidy plan can be understood only in political terms. The country is riled up about the unemployment rate, and so, demands that the government do something. So it is doing something, just not anything that will affect the unemployment rate....

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