There is one guaranteed way to stimulate employment. That’s to cut taxes for employers, and make it known that the cuts will be in place for a very long time. That stability will be the enticement that employers need to feel confident about expanding their operations. This is historically verifiable for anyone who looks. But in a strange dream that somehow strategies that have never worked before will now start to work, Congress looks to create jobs, but will it be enough?
Democrats in Congress are furiously crafting legislation to spur job creation, but experts warn that the benefits could be too small to make much difference.
Senate Democrats plan to meet Tuesday to discuss a package that could provide billions in help for strapped state and local governments, as well as infrastructure projects. They’re also considering tax breaks to small businesses for hiring workers and to help make homes more energy-efficient.
The House of Representatives passed its own $154 billion jobs plan last month.
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Some analysts warned that such limited stimulus measures would hardly make a dent in a $14.2 trillion economy, however.
“It’s more of a painkiller than a cure,” said Robert Bixby , the executive director of the Concord Coalition , which monitors fiscal issues.
“While $150 billion might give the economy some stability, it’s not large enough to make much of a difference,” added Muhammad Islam , an associate professor of economics at St. Louis University .
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“The roadblock is just general business confidence,” Bethune said. “Whether this kind of legislation will do the job is hardly clear.”
During his campaign, when a reporter pointed out to Obama that across-the-board tax cuts had created economic booms in the past, he said, regarding even-handed tax cuts for all economic classes, “It’s a matter of fundamental fairness,” by which he meant that tax cuts that benefit all economic classes, including the “rich,” are somehow unfair. The Left, of course, is only for “targeted tax cuts,” meaning tax rebates to people who pay little or no tax.. and who do not engage in the kind of economic activity that creates jobs.
Crystal ball time (not that it’s especially difficult to predict that what has happened before will happen again): the Democrat congress will not lower taxes generally, in a way that affects all businesses and likely employers. They will fund a bunch of non-productive public works projects that will create flurries of employment, but nothing sustained, nothing that leads to a true recovery. They will lionize themselves for small gains, and portray themselves as the great rescuers of the economy.
Hopefully, the electorate will know better. Of course, they didn’t in 2008.
Reagan proved that cutting taxes during a recession is the surest road to recovery. Obama and the Democrats are raising them, regardless of what they say, simply by allowing the Bush tax cuts to expire in 2010.
Some people are slow learners.
February 3rd, 2010 2:30 pm
Amen! People aren’t hiring because they aren’t sure what the cost of business is going to be. They know there will be massive tax increases, especially with the ridiculous 3.6 trillion dollar budget the feds want to pass this year. So everyone is holding on to their money, just trying to stay in business. No wonder it’s so hard for me to find a job! Most people are seeing through this administration, and will hold them accountable at the next election. My concern is how much more debt will we have to pay back when it’s all said and done, and where is it going to come from? There’s no way we can keep this up; our spending is unsustainable, making our country insolvent. Well said, prof!
February 3rd, 2010 7:59 pm
It was interesting listening to Obama’s speech regarding the first stimulus packages success. He indicated that due to the success of this stimulus – we have kept the jobs of many teachers, firefighters and police. Please note – all are government employees. So, when we have to raise taxes to “pay for the stimulus” – please understand that we are paying back a previous “bond” issued (not voted) by the president to keep government employees at work – while industry and small business suffered – meaning those who bring in wealth.
Government is not a bad thing – it is a good thing. However, improperly sized and/or powered government is a bad thing. I look at government as overhead to the country. If you don’t reign in your overhead, you become top heavy – and the structure that creates wealth cannot sustain the burden.
In my opinion, if we went from 4% to 18% (probably conservative) unemployment – we should drop 14% of our government workers.
Noelle is exactly right – businesses are unsure of their financial platform, so they won’t add to their cost structure.
We need to get rid of income tax altogether. Go to a straight sales tax. That will equally tax everyone. Those who are rich – don’t have income – they have investments that don’t get taxed as they are being re-invested. Those earning wealth in the stock market aren’t taxed on income as it is reinvested. Those making money in real estate aren’t taxed as it is re-invested. Illegal money from non-documented workers (some), drugs, etc. is never taxed. These would all have proper taxation during spending. Additionally, it would take these high taxes OUT of domestically manufactured products making our products more competitive on the world market. Additionally, it would increase the cost to the consumer on the foreign manufactured products to US consumers incentivising domestic manufacturing.
We need to take expenses by non-citizens and charge back their country of origin. This would deter those countries from pushing their people over here for free care and education. If the country doesn’t pay, put a tariff on the goods entering our country from theirs.
If we come to a conclusion on health care, cost of toxic loans, cost of bailouts, cost of deficit, cost of cap and trade – then we can build businesses on a solid model. Entrepeneurs are risk takers by nature, but they are not irresponsible. Give them a platform to work on – cutting taxes and increasing expense write offs is an excellent start. They will get the economy going.
You can’t dig yourself out of a hole!
February 5th, 2010 9:44 pm
Hello,
Harmonicminor, the reason for the government spending money on jobs programs rather than cutting taxes for employers comes down to multiplier effect. The equation for the government expenditures multiplier is 1/1-mpc, while the tax multiplier is -mpc/1-mpc. Assuming that the MPC (marginal propensity to consume, aka the amount of money spent per dollar earned) is 0.7 (meaning 70 cents of each dollar earned is spent, while 30 cents is saved), the multiplier for this $154 billion jobs bill is $154 billion x 1/1-0.7, or $513.33 billion. If the government were to do a tax cut instead of the jobs bill with the same cost to them of $154 billion, it would create much less value in the economy. Here are the numbers: -$154 billion x -0.7/0.3 = $359.33 billion. So, for the same cost to the government, the jobs bill would create $153 billion more value than a tax cut. The quotes were correct in saying that this is not very significant in terms of the size of our economy, and that is precisely why many economists have been calling for a second, larger stimulus bill. You are right in saying that Reagan proved that large tax cuts can work well in lifting the country out of a recession, but $1 in government expenditures has been shown to make a much larger impact on the overall economy than $1 in tax cuts, and that is why congress is choosing to go this direction.
Bill, if we were to indeed take your advice and lay of 14% of government workers, that would add another 280,000 people to the ranks of the unemployed in America (14% of about 2,000,000 federal employees). That would surely send the economy back into a free fall. Also, if when you said “You can’t dig yourself out of a hole!” you were referring to a country not being able to spend-itself out of a recession, then you are incorrect. That is precisely what Reagan did with his tax cuts, and what can be more effectively done with government expenditures. If the economy is down, tax revenues are down, so if the government can do something that will stimulate the economy, then they can soon recover more than they spent due to the multiplier effect. So yes, in that sense you can “dig yourself out of a hole.”
February 5th, 2010 10:13 pm
Economist, this is so funny I’m still holding my sides trying to get my breath… which is making it hard to type. But:
If anything you said was true, then the only proper response for a government that really cared about us would be to spend ten times more than they’re spending, so we can REALLY reap that “multiplier” effect. Matter of fact, if they spent a hundred times as much, we’d all be zillionaires.
February 5th, 2010 11:05 pm
Economist – So, if I understand you correctly – We continue to take more from wealth producing entities and pile it into overhead. When Reagan cut taxes – money went into the hands of the business owners to grow their business. They had more control and stability with the capital to invest. The “stimulus” package has been primarily been going to government workers – according to Obama (Teachers, Firemen and Police). This doesn’t move the economy. It is an expense – not an investment.
I think you mis-underestimate the effect that taxes – government spending and control has on the small business owner. We are stifling the economy by setting an unsure platform to the business owner. He understands paying back what you owe – unlike most in the government who live on “how much deficite can I leave to those trailing me”.
February 6th, 2010 3:15 pm
Harmonicminer, Im glad you got a good chuckle out of that. I hear that makes you live longer. Obviously, just as one would not propose that a government cut all taxes to reap the tax cut multiplier and stimulate the economy (thus ceasing to have a government), one would not propose that a government spend “ten times or a hundred times” of the recommended stimulus. There are obvious limits on these macroeconomic actions. If there is a lack of money in circulation, a stimulus can get more money out there and get things moving again. Too large of a stimulus and you have inflation. Too small of a stimulus and not much changes.
http://www.amazon.com/Principles-Macroeconomics-N-Gregory-Mankiw/dp/0324589999/ref=sr_1_1?ie=UTF8&s=books&qid=1265493524&sr=1-1
Bill, see above for the limits on stimulus (and tax cuts). You are right in saying that the stimulus package has primarily gone to those who work for the government. You are wrong though in saying that that doesn’t move the economy. A teacher who now gets to keep her job can continue to pay rent, she can buy food at the grocery store, she can buy clothes at the department store, she pay her utilities. See what I am getting at? Nothing in our economy is isolated. Every job matters, whether they are employed by the government or not. If they have a job they can spend money at local businesses, which in aggregate allow the businesses to not only stay open, but not have to lay anyone else off, and as more people begin spending money they can start hiring again. So, yes. It is an investment.
And to speak highly of the Reagan tax cuts, but speak poorly of the “how much deficit can I leave to those trailing me” is a bit contradictory. Reagan’s tax cuts, while successful at stimulating the economy, left the country with one of, if not the largest deficits in U.S. history.
February 6th, 2010 3:55 pm
Hmmm… economist, I don’t know you, but you sound like someone who has had recent undergraduate training in macro-economics from the perspective of Keynes.
There are “experts” on both sides of this discussion, of course. You want to throw in with the statists. I don’t. You think that the government spending that results in a few more people able to spend a little more money can actually grow the economy. I don’t. What grows the economy is concentrations of capital that allow the production of things that would not exist without that concentration of resources. And those producers (who were able to create things with concentrated capital that would not have existed otherwise) are the people/corporations/businesses that create wealth.
The funny/sad thing about this: the young people of today, some of whom like Obama style economics, are the ones who are going to pay and pay and pay, when the bill comes due. And it will.
I’ll do you the courtesy of assuming that you know that there are experts who know a great deal more than you who radically disagree with everything you say. I’m aware the reverse is also true. So I won’t start quoting names/books… let me know if you’d like me to. I’ll just say that one side in this discussion, the Keynsian side, requires me to trust the “experts” and the government to know how much is too much, and how much is just enough, and just how the money should be spent, blah blah blah. Like Hayek, I don’t think there is ANYBODY who knows that much. I don’t think the twenty most brilliant economists in the world know that much.
I see no national track record anywhere that makes me believe that Keynsian approaches have worked to create and sustain wealth for a decent period of time.
I trust the market, in a system of laws to enforce contracts and prevent coercion, and the freedom of people to decide how to spend their own money. Of course, when government meddles in the market (as it did to create the housing bubble) then government typically blames the market when the correction occurs. Predictable behavior of statists everywhere, of course.
I note that tax receipts go UP when taxes are cut. And I note that the Reagan tax cuts produced exactly that effect, while a Democrat congress insisted on increasing social spending and so outpacing those receipts. But the result of the tax cuts in stimulating economic activity is just unquestionable. It has worked pretty much everywhere it’s been tried.
So I’ll see your Marginal Propensity to Consume and raise you one Laffer Curve.
February 6th, 2010 5:32 pm
It’s true, some of my macroeconomic studies have been in the vein of Keynes, but most of it has not. I have read a lot from the Hayek side and from the Keynes side. I know a good amount of what the experts on both sides have to say, and I know that the experts on both sides are much smarter than I.
I agree with you. There are experts on both sides, but to say that one side’s approach absolutely works, while the other side’s does not is empirically untrue. It is not that simple. I do not question that tax cuts stimulate the economy. Many do state that tax receipts did not go up under Reagan’s tax cuts, so these things can be argued in circles all day. Many also believe that the Keynes approach brought us out of the depression (WWII, massive gov’t spending, 1950-60 boom). Unfortunately, the Laffer Curve also requires us to trust the “experts” in the government to know exactly where to set taxes to bring in the most revenue. Set them too high, we bring in nothing. Set them too low, we bring in nothing. The Laffer Curve is an inverted U precisely because in that model there is one point that brings in the most revenue, and it lies somewhere between no taxation and 100% taxation. It is not as simple as just reducing taxes. Half the time the Laffer Curve calls for taxes to be raised. Again it is up to the “experts” and the government to set the taxes.
This is why some have deemed economics “the most complicated of the sciences.” It just isn’t that simple.
Blessings!
February 6th, 2010 5:58 pm
“Many do state that tax receipts did not go up under Reagan’s tax cuts”
I think that’s empirically provable. Don’t you? Who are these “many” who state otherwise?
“Many also believe that the Keynes approach brought us out of the depression (WWII, massive gov’t spending, 1950-60 boom)”
Hard to say how it would have gone without the “massive government spending”… but what is observable is that the massive spending of WW II DID actually produce goods (i.e., new wealth), it did not primarily fund entitlements. The huge productive capacity that was built up to produce war materiel was turned to consumer goods after the war, and the effect of the massive WWII spending WAS to concentrate large amounts of capital in relatively few hands, allowing efficient production for the war effort.
Your comparison of the Laffer Curve to the Keynesian model reveals the fundamental aim of statists: “to maximize revenue.†But supply-siders aren’t primarily interested in revenue to the government, per se, they are interested in economic growth, of which revenue to the government is a nice bonus.
You’re correct, it isn’t just as simple as “reducing taxes†indefinitely. There is a point of diminishing returns where government no longer has the funds to exercise its proper role. But it is a simple idea that when people are losing jobs because employers can’t afford them, reducing taxes on those employers will help… and increasing taxes on them will hurt…. and probably increase tax receipts in the bargain. We are nowhere near the “danger point†in tax reduction… Or do you think we are?
Much of this really boils down to a political argument, not an economic one. Statists want the government to control more. Freedom lovers don’t. Statists trust the government to spend the public’s money wisely in nearly any amount, freedom lovers don’t. And so on.
That’s why Friedman’s “Free to Choose†has the title it has.
Hmm… I had the impression from your first comment, when you quoted your MPC formula (a perfect example of something no one really knows), that you were implying that it WAS simple arithmetic.
Perhaps you trust the government more than I do.
February 6th, 2010 7:43 pm
I tried to put too much in one sentence here: “But it is a simple idea that when people are losing jobs because employers can’t afford them, reducing taxes on those employers will help… and increasing taxes on them will hurt…. and probably increase tax receipts in the bargain.”
What I meant was that reducing taxes on employers will help… and probably increase tax receipts in the bargain.
Oy.
February 6th, 2010 7:48 pm
One question, Economist: you alluded to the fact the both Keynsian and supply-side (a la Laffer) involve “experts” making calculations. You can correct me if you think I’m wrong… but I have the impression that the Keynsian approach involves a much more complex set of calculations, with a lot more assumptions about relationships of things and ratios between this and that, than Laffer’s approach, which seems based more on directly measurable things. As, for example, your MPC of 70 cents on the dollar… which is surely not anything anyone actually knows, depends on your defintion of “save”, etc.
Am I wrong?