The hawks are circ(u)l(at)ing

Two interesting and somewhat discouraging trial balloons have been floated by the Senate recently:

Schumer-Hatch payroll tax break

First, in a NYT op-ed, Sens. Schumer and Hatch propose a payroll tax credit for employers who hire someone who’s been out of work for 60 days or more. This is intended to be a much simpler approach than the disastrous jobs tax credit of the 1970s:

…any private-sector employer that hires a worker who had been unemployed for at least 60 days will not have to pay its 6.2 percent Social Security payroll tax on that employee for the duration of 2010. The Social Security trust fund will then be made whole with spending cuts elsewhere in the budget between now and 2015. That’s it. Simple to understand, and easy to explain.

Simplicity is a reasonable objective, but as described, the proposal is NOT going to stimulate a return to full employment, because it’s fiscally hawkish, i.e., it aims for budget neutrality. Thus, the net economic effect is likely to be somewhere around nil, give or take.

It also gives no payroll tax break to the newly hired employees! That is NOT likely to play well to a frustrated electorate. Warren Mosler’s version of a payroll tax holiday would be fairer and much bolder. As he framed it at a recent Tea Party get together:

I believe that the surest engine for full economic recovery is a full payroll tax holiday. Payroll taxes take away over 15% of everyone’s paycheck, from the very first dollar earned. This is big money- about $1 trillion per year. Half comes from the employee and half from the employer. A payroll tax holiday does not give anyone anything. What it does is stop taking away $1 trillion a year from working people struggling to make their payments and stay in their homes, and businesses struggling to survive. A full payroll tax holiday means a husband and wife earning $50,000 a year each will see their combined take home pay go up by over $650 a month, so they can make their mortgage payments and their car payments and maybe even do a little shopping.

In their op-ed, the Senators also claimed:

Our two-pronged approach would be a far more efficient use of taxpayer dollars than other proposals under discussion, all of which could cost many times more with very little guaranteed improvement in unemployment. [emphasis added]

Taking care to use taxpayer dollars efficiently is a wonderful thing when resources are fully employed and there are sufficient dollars in circulation. But in the prevailing environment, it’s far too hawkish. As some have noted, the key factor that will incentivize hiring is for businesses to see signs of improving demand; tax breaks like this one are unlikely to have more than a marginal effect. And as long as Congress is stingy about deficits and about where taxpayer dollars come from, it could merely reallocate existing resources, rather than raise overall employment.

The entire idea brings to mind the old Hefty Bag jingo: WIMPY WIMPY WIMPY!!!

Senate jobs bill

Second, Senate Democrats have been circulating a comprehensive jobs bill that includes the Schumer-Hatch proposal. Positive features include extension of unemployment benefits and subsidies. More questionable are the extensions of various expired tax provisions through the end of 2010. Like financing federal expenditures with existing “taxpayer dollars”, sunset provisions will tend to offset any stimulative effects of ’stimulus’.

From the proposed measures in the bill, it looks like members of Congress, especially Senators, believe that their reelection prospects hinge on budget and debt hawkishness. That might well be true, given that our educational system has done a lousy job teaching economics for generations. If that’s their angle, then they’re as bad as their policy ideas: WIMPY WIMPY WIMPY!!!

It’s estimated that the bill would create 80,000 to 180,000 new jobs in the coming year. We would need 180,000 or so per month to meaningfully reduce unemployment. Taking secondary effects into account, the typical employment multiplier falls in a range of roughly 2 to 4. That means that the overall impact on employment would range from 160,000 to 1.44 million new jobs in 2010. This would make less than an 18% dent in the number of jobs lost in this recession! [We've assumed that multiplier effects are not accounted for in that number; if they are, the package is even more pathetic.]

Admittedly, we’re leaving out private sector employment and the related multipliers, and 1.44 million new jobs would still be a good thing. But the glaring problem is that policymakers seem to believe that the real economy is in the kind of shape it’s been in since the mid-1980s, and that it will do just fine with the federal government contributing a net 20% or so to economic activity. We strongly disagree, and would point out that policymakers in Japan made the same error over their two lost decades. Policymakers need to dramatically raise expectations in the private economy, whether it’s through spending, tax cuts, or a combination of both. Wimpy proposals are not going to get it done.  

If the Senate bill is as good as we get, then our strong dollar call remains in place, and incumbents could face some rough sledding in November. The Obama administration is reportedly trying to work some better features into the bill, but most of them have an undeniable fiscal wimpiness to them, and thus won’t do much to alleviate the stubborn shortage of dollars, income, and employment in the real economy.

As J. Wellington Wimpy might say, “You will gladly pay me today for a job created tomorrow.”

Update 2/14/2010 – Perhaps this description of neo-Keynesian economics explains the cruelty of Hatch-Schumer:  “Tax cuts can deepen a recession if the short-term nominal interest rate is zero, according to a standard New Keynesian business cycle model. An example of a contractionary tax cut is a reduction in taxes on wages. This tax cut deepens a recession because it increases deflationary pressures.”  Good grief. The honorable gentlemen should note that this is just economic theory, which is far from settled (and that economists are probably not a good source of reelection advice). 

URLs:

http://www.nytimes.com/2010/01/26/opinion/26hatch.html?scp=2&sq=orrin%20hatch&st=cse

http://moslereconomics.com/2010/02/04/dallas-address/

http://www.webcpa.com/news/Senate-Democrats-Jobs-Bill-Includes-Tax-Breaks-53257-1.html

http://news.yahoo.com/s/ap/20100210/ap_on_bi_ge/us_what_jobs_11

http://www.newyorkfed.org/research/staff_reports/sr402.pdf