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Like Giving Medicine to Healthy People

From WebCPA

Businesses will be able to claim up to $8.5 billion in tax exemptions and credits for 4.5 million recently hired employees under the HIRE Act, according to a new Treasury Department report

The Hiring Incentives to Restore Employment Act of 2010, which was signed into law in March, provides employers with an incentive to hire workers who have been unemployed for 60 days or longer by exempting wages paid to these workers from the employer’s 6.2 percent share of Social Security payroll taxes for the remainder of the year. In addition to exempting employers from these payroll taxes, the HIRE Act allows employers to claim a tax credit of up to $1,000 for each newly hired qualifying worker who is retained for one year. An employer is eligible to receive almost $3,500 in tax savings from hiring an unemployed worker who is paid $40,000 in salary this year.  

Using monthly data from the Bureau of Labor Statistics’ Current Population Survey, the Treasury Department estimated that, from February 2010 to May 2010, 4.5 million workers who had been unemployed for eight weeks or longer were hired by employers who are eligible for the HIRE Act payroll tax exemption. If these 4.5 million newly hired employees remain employed for the rest of the year, their employers would be eligible for an estimated $5.1 billion in payroll tax savings as a result of the Act. Furthermore, if three quarters of the workers remain employed for 52 weeks, then their employers would receive another $3.4 billion in tax credits for these hires. 

Ironically, the story's tagline is  "4.5 Million New Workers Eligible for Tax Exemptions," but that's far from accurate. Instead, companies that have hired from that group of 4.5 million are eligible for tax breaks. That, despite the fact that the corporate sector as a whole has a healthier balance sheet than households and the public sector, and presumably plenty of carry forwards against tax liabilities due to the recession. 

We're all for incentivizing the private sector to hire and produce. However, under current circumstances, where corporate profits as a percentage of GDP are at their highest level in 40 years, this is like giving medicine to the hospital staff instead of the patients. Why not share the payroll tax savings with the employees, who, we can safely assume, could use the additional funds provided by a temporary 6.2% pay raise as they recover from a long period of unemployment?

One could argue that this is simply an artifact of GDP having fallen faster than profits during a recession. However, if we look at compensation on the same basis, the disparity between employee compensation and profits becomes even more pronounced. From the NYT

 Chart: Not Sharing in the Gains 

Again, one of the better policy prescriptions for (1) a household sector trying desperately to repair balance sheets and (2) an economy facing a shortfall in demand is an immediate payroll tax holiday of one year or more, like Warren Mosler has prescribed

We think a permanent 'employer of last resort' policy is worth a look as well. We've pointed out several times that this idea has been put forth by Nobel economist Ned Phelps on the right, and Post Keynesians like Randy Wray on the left. Today we learned that it was favored by Rev. Martin Luther King as well, inspired in part by the 'classical progressivism' (pdf) of Henry George, and that King saw it as an eminently bipartisan possibility as far back as 1967. 

From King's book Where Do We go From Here?

Up to recently we have proceeded from a premise that poverty is a consequence of multiple evils: lack of education restricting job opportunities; poor housing which stultified home life and suppressed initiative; fragile family relationships which distorted personality development. The logic of this approach suggested that each of these causes be attacked one by one. Hence a housing program to transform living conditions, improved educational facilities to furnish tools for better job opportunities, and family counseling to create better personal adjustments were designed. In combination these measures were intended to remove the causes of poverty. 

While none of these remedies in itself is unsound, all have a fatal disadvantage. The programs have never proceeded on a coordinated basis or at a similar rate of development. Housing measures have fluctuated at the whims of legislative bodies... Educational reforms have been even more sluggish and entangled in bureaucratic stalling and economy-dominated decisions. Family assistance stagnated in neglect and then suddenly was discovered to be the central issue on the basis of hasty and superficial studies. At no time has a total, coordinated and fully adequate program been conceived. As a consequence, fragmentary and spasmodic reforms have failed to reach down to the profoundest needs of the poor. 

In addition to the absence of coordination and sufficiency, the programs of the past all have another common failing -- they are indirect. Each seeks to solve poverty by first solving something else. 

I am now convinced that the simplest approach will prove to be the most effective -- the solution to poverty is to abolish it directly by a now widely discussed measure: the guaranteed income. 

Of course, in a democratic society, few people are going to approve the social promise of a "guaranteed income" if society receives nothing of value in return. Modern EOLR proposals are cognizant of this, as were New Deal employment programs, for the most part. As we've admitted previously, there would be plenty of agency risk involved in such an ambitious public sector program. But there always is, in the public and private sectors alike. 

King argued that the effects of such a program would extend beyond the material: 

...a host of positive psychological changes inevitably will result from widespread economic security. The dignity of the individual will flourish when the decisions concerning his life are in his own hands, when he has the assurance that his income is stable and certain, and when he knows that he has the means to seek self-improvement. Personal conflicts between husband, wife and children will diminish when the unjust measurement of human worth on a scale of dollars is eliminated. 

It's refreshing to see psychology brought up in a discussion of economic policy. Clearly, despite the utopian prose that King brought to bear, no one would expect an EOLR program to solve all social ills, or even end unemployment. There would still be a number of people unemployed, some voluntarily, others involuntarily. But the proper measure of policy is whether the net expected outcomes lead to something more optimal than the status quo. 

As with the moniker "guaranteed income," King's vision of the program was more radical than current EOLR proposals: 

Two conditions are indispensable if we are to ensure that the guaranteed income operates as a consistently progressive measure. First, it must be pegged to the median income of society, not the lowest levels of income. To guarantee an income at the floor would simply perpetuate welfare standards and freeze into the society poverty conditions. Second, the guaranteed income must be dynamic; it must automatically increase as the total social income grows. Were it permitted to remain static under growth conditions, the recipients would suffer a relative decline. If periodic reviews disclose that the whole national income has risen, then the guaranteed income would have to be adjusted upward by the same percentage. Without these safeguards a creeping retrogression would occur, nullifying the gains of security and stability. 

The idea of indexing for inflation is not controversial, though it might be politically difficult, even today -- note that the U.S. minimum wage has never been truly indexed for inflation, and has fallen in real terms over time. On the other hand, pegging a guaranteed income policy to the median income level is not only radical, it's preposterous. Anyone earning below a median wage would have the option of not working (or at least not working in the private sector, depending upon how the program is constructed). That creates more problems than it solves.  Today's EOLR proposals tend to use the minimum wage rate as a starting point. 

King then makes an interesting observation: 

The contemporary tendency in our society is to base our distribution on scarcity, which has vanished, and to compress our abundance into the overfed mouths of the middle and upper classes until they gag with superfluity. If democracy is to have breadth of meaning, it is necessary to adjust this inequity. It is not only moral, but it is also intelligent. We are wasting and degrading human life by clinging to archaic thinking. 

Which is especially interesting when contrasted with his quotation from Henry George: 

In 1879 Henry George anticipated this state of affairs when he wrote, in Progress and Poverty:

"The fact is that the work which improves the condition of mankind, the work which extends knowledge and increases power and enriches literature, and elevates thought, is not done to secure a living. It is not the work of slaves, driven to their task either by the lash of a master or by animal necessities. It is the work of men who perform it for their own sake, and not that they may get more to eat or drink, or wear, or display. In a state of society where want is abolished, work of this sort could be enormously increased.

The implication is that King saw a society where basic material wants had been abolished for some (a reality that poses its own interesting problems that George may not have addressed), but not for others, and that a guaranteed income policy offered a way to redistribute that sense of well being more equitably. We see plenty potential problems with that line of reasoning too. 

However, as we've pointed out, modern EOLR proposals tend to be far less radical. And interestingly enough, there are 'endowment' proposals that are tangential, at least in a financial sense, to the proposal King outlined. In finance, we can easily (in theory, if not in practice) discount any future stream of cash flows to a present value. Thus, a public endowment at birth is essentially the same thing as a guaranteed future income, though the figures being proposed -- $500 to $1,000 per child in the U.S. and the U.K. -- fall far short of even the minimum wage. But it's compensation for simply being born, and represents an interesting development as far as it goes. 

The ever present risk to ideas like individual endowment funds and EOLR programs is that many voters fear that they will have to foot the bill in the form of higher taxes. Unfortunately, until federal policymakers understand how a fiat monetary system works (and ought to work), those fears are probably well placed.

Remember, only the federal government creates money, which is its non-interest bearing debt. The rest of us just use it. Currently, money creation is governed by profit seeking activity via the federal reserve banking system. That is not a bad thing, but making room for certain kinds of social spending in the money creation process need not be the boogey man that so many reflexively believe. Social spending that helps mitigate uncertainty or insure against risk -- defense spending or social security, for example -- is a boon to the private sector, not a bane. Wary conservatives should take note that the iconic Arthur Laffer has expressed support for the idea of universal major medical coverage.

EOLR and endowment at birth policies present creative possibilities for dealing with social challenges. They should be honestly and openly debated, without the usual political rancor.

IMPORTANT DISCLOSURES: Symmetry Capital Management, LLC (“SCM”) is a state registered investment adviser in the Commonwealth of Pennsylvania. The views expressed by the author are as of the publication date, and are subject to change based on market and other conditions. The foregoing information is for informational, educational, or entertainment purposes only. It does not constitute an offer to buy or a solicitation to sell any security, or to engage in any investment strategy. Investors should not use this information as a basis for any investment decisions without first consulting their own financial adviser. PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.



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