Tuesday, October 6, 2009

Dean's Big Idea (once again)

By the Sandwichman,

Maybe when Dean Baker first floated this idea (back in January) it was too soon and people weren't worried enough yet about unemployment. Dean was ahead of the curve. Now that everyone is wringing their hands about the jobs crisis, one of the hand wringers will take notice enough to at least say why not. Sandwichman is not holding his breath, though:
There are many ways that the federal government can boost demand, with more aid to state and local government probably topping the list in terms of priorities. However, to get large numbers of workers back to work quickly, the best route is a tax credit to shorten normal working time.

The basic logic is very simple; the tax credit effectively pays employers to hire more workers, with each worker putting in fewer hours. If we used the tax credit to pay employers of 100 million workers to work 5 percent fewer hours, while keeping their take-home pay unchanged, then in principle they should want to hire 5 percent more workers, or five million workers. This can be done quickly and will involve more employment in the private sector, not make work public sector jobs. That should make the conservatives happy.

There undoubtedly will be some gaming of such a tax credit, but there is some waste/fraud in everything we do. The prospect of having 15 million people unemployed for much of the next two years is unacceptable. Having used trillions of dollars in loans to bail out the richest people in the country, it is time that the government take some bold steps to help everyone else.


TheTrucker said...

So what will happen is that the employers will put the money in their pocket and say thank you. They will cut the hours of the current employees and hire a bunch of bums for $1 an hour while taking the tax credit to the bottom line. No production needed. "There will be some gaming"? There will be nothing but gaming. A valiant attempt. But no cigar.

The best thing to do is to give away money in unemployment checks and free medical care. Make it to where people don't want no stinkin jobs. That will make wages rise and solve the demand problem. Lets see the employers "game" that one. It also devalues the dollar and stops the offshoring and the Chinese imports. All done, thank you.

BMW said...
This comment has been removed by a blog administrator.
Anonymous said...

Health care reform that decouples health care from employment (so that employers don't have this administrative overhead associated with hiring workers) would do more to make employers receptive to reduced work time than this tax credit.

S Brennan said...

October 06, 2009

The Easy Way to Game the New Hire Tax Credit: Hire Your Contractors

The NYT reported on discussions in the Obama administration to implement a tax credit of $3,000 for companies that hire additional workers. The hope of course is that this will be a spur to job growth.

Most studies show that labor demand is highly inelastic (this is why increases in the minimum wage have little effect on employment), so a tax credit that modestly decreases the cost of labor is unlikely to have much effect on employment. On the other hand, there would be many opportunities for employers to game this tax credit.

The most obvious is simply bringing some jobs on payroll that are currently contracted out. For example, if a company currently contracts out its custodial services it can instead hire people on its payroll to do this work and get the $3,000 tax credit. This would lead to no net gain in jobs. It would have been helpful if this piece had included some analysis of this tax proposal.

The article also discusses the possible extension of the $8,000 first-time homebuyers tax credit. It would have been worth noting that this tax credit is likely to temporarily inflate house prices ($8,000 is approximately 4.7 percent of the median house price). That means that people who buy homes when the credit is in effect can expect to sell them at a lower price (inflation adjusted) assuming that the credit does not remain in place indefinitely.

There was an enormous amount of misinformation about home prices distributed by the housing industry and the media during the bubble years. It would be helpful if the media tried to do a better job informing the public about predictable movements in house prices now.

--Dean Baker
Posted at 05:53 AM