CBS News, October 23, 2009, Friday

CBS News

October 23, 2009, Friday

CBS News


Will Job Tax Credits Put America Back To Work?

Check out this Forbes piece by Newt Gingrich and Dan Varroney on how to reignite the jobs market. Unfortunately, there's little new here as Gingrich and Varroney essentially offer a best hits compilation left over from the Bush era. Don't claim surprise. (After all, the publication does call itself a "capitalist tool.")

But at least they've got their thinking caps on and with the unemployment rate nearing the 10% mark, the administration's hardly in a position to peremptorily dismiss good advice. The trick is to find an economic recipe that will work in what are admittedly extraordinary economic times. Even after monumental adjustments in fiscal and monetary policy, the latest data from the government show that federal spending has saved or created just 30,383 jobs. (On MSNBC's "Morning Meeting" Friday, the chief economist for Vice President Biden, Jared Bernstein, said the snapshot was a preliminary estimate and that a more accurate number would be closer to 1 million jobs saved or created, or roughly 2 to 3 percentage points of GDP growth in the third quarter.)

Whatever the final tally, however, the employment outlook remains grim. That's why a tax credit proposal by a couple of labor experts writing a paper for the Economic Policy Institute - where, parenthetically, Bernstein used to work as a director - is starting to garner attention. Timothy J. Bartik of the W.E. Upjohn Institute for Employment Research and John H. Bishop of Cornell University make the (I think correct) argument that traditional stimulus policy does little to put people back to work in a hurry.

In their paper, Bartik and Bishop lay out an argument for a new tax credit targeted at businesses. For a nation weary - and wary - of taking on more debt, this is not another TARP-like giveaway. The cost of a marginal cut in the cost of hiring would be $28 billion in the first year. Uncle Sam would recover half that amount because it would be spending less on social welfare programs such as unemployment insurance or Medicaid.

The credit would be equal to 15% of expanded payroll costs and the payoff, according to the authors, is another 2.8 million people hired over the next couple of years.

"In the first year the credit would be equal to 15% of the net increase in that portion of a firm's payroll subject to Social Security taxes," they write. "In the second year the credit would drop to 10%. This would encourage firms to hire sooner rather than later, and would provide a significant incentive for expanded employment. Furthermore, this is a time period when new jobs are clearly needed."

What with Democrats and Republicans sniping over everything from health care regulation to Afghanistan to Roger Clemens, might this be one policy proposal both sides of the aisle can rally around? On the one hand, it has the appeal of a grass-roots incentive where entrepreneurs and businessmen decide, not some faceless bureaucracy in Washington. Music to Republican ears. At the same time, it would put more people back to work at a time when the lingering effects of the longest recession since World War II keep pushing up the unemployment rate — or at least it would in theory. What Democrat could say no to that?

In The Atlantic, Derek Thompson correctly notes that tax incentives are vulnerable to being gamed. He points out that "employers might try to rig the system and apply for tax credits for existing hires or ones they already planned to make. Another potential hitch: Firms that "fire workers before the start date of the credit and hire them back when the credit kicks in, which would effectively mean the government's just handing out money to the companies."

I suppose that's why we have regulations. Sometimes the connivers do get away with murder but that's hardly sufficient reason for inaction. Fact is that the Fed, which has already cut short-term interest rates virtually to zero, can't do much more to stimulate investment demand. Wall Street may be living large(r) with the Dow back around the 10,000 level, but the runup in the stock market is not doing much for Main Street. Whatever "green shoots" are peeking through the ground, it's still slim pickings out there. Bartik and Bishop sum it up this way:

"The freeze of financial markets last fall destroyed business confidence and led to big cuts in employment and capital investment...Is it realistic to hope that the (job creation tax credit) will help reverse the pervasive pessimism that is undermining employer confidence that investing in new products and services will be profitable?"

Worth a shot, no?