Saturday, March 21, 2009

Dean Baker's "Third Round"

by the Sandwichman,

Along with Jamie Galbraith, Dean Baker also believes "the economic crisis, and its solution, are bigger than you think." In a report issued Tuesday, Baker "makes the case for a third stimulus package to in the face of economic indicators signaling that the economy is in a deeper downturn than was expected based on previous projections."
To get money into the economy effectively and quickly, the report proposes a stimulus package consisting, in part, of two tax credits: an employer tax credit that would extend health care coverage and another per worker credit for employers increasing the amount of paid time off.
Excerpt from The Housing Crash Recession and the Case for a Third Stimulus after the jump.
The other obvious mechanism for quickly boosting demand is employer tax credits for giving workers paid time off. The paid time off can take a variety of forms, such as paid family leave, paid sick days, paid vacation days or a shorter workweek. The idea is that the government would give an employer a tax credit of up to $2,500 per worker per year to cover the cost of a reduction in work hours of up to 10 percent of their work time.

This tax credit, like the health care tax credit, could be implemented with very little lead time and little bureaucracy. To qualify, an employer would need to post on a public website the reduction in paid work time that they have put in place. Since workers could see the work-time reduction claimed by their employer, they would be able to verify that the policy has in fact been put into place. The arithmetic on this is straightforward. Suppose that employers of 60 million workers reduce their work time through family leave, sick days, or shorter hours by an average of 5 percent, at an average cost of $2,000 per worker. Since demand will not have changed (workers are getting paid just as much as they had previously), employers will in principle want to hire an additional 3 million workers to make up for the lost labor hours. This would imply 3 million new jobs, or jobs saved (in many cases, it may prevent layoffs that would have taken place otherwise), for an expenditure of $120 billion.

The great virtue of this sort of tax credit is that it is both boosting GDP and also increasing the number of jobs for every level of GDP. If everyone in the economy worked 5 percent fewer hours, and we had the same level of output, then we would have 5 percent more people working. For this reason, it is the most efficient mechanism for bringing the economy back to full employment.


Rdan said...


Beth Isreal Hospital is doing an equivalent through reduction in salaries, starting with the CEO and the Board (many who are docs).

No details yet.

gordon said...

If I were an American I would be much more interested in direct Govt. employment. In a recent Washington Monthly article (ack. Economist's View), Jamie Galbraith referred to a paper by M.Auerback in which Auerback listed some of the things accomplished by direct Govt. employment during the Depression in the US:

"[Roosevelt’s] government hired about 60 per cent of the unemployed in public works and conservation projects that planted a billion trees, saved the whooping crane, modernized rural America, and built such diverse projects as the Cathedral of Learning in Pittsburgh, the Montana state capitol, much of the Chicago lakefront, New York’s Lincoln Tunnel and Triborough Bridge complex, the Tennessee Valley Authority and the aircraft carriers Enterprise and Yorktown. It also built or renovated 2,500 hospitals, 45,000 schools, 13,000 parks and playgrounds, 7,800 bridges, 700,000 miles of roads, and a thousand airfields. And it employed 50,000 teachers, rebuilt the country’s entire rural school system, and hired 3,000 writers, musicians, sculptors and painters, including Willem de Kooning and Jackson Pollock."