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Obama Jobs Plan Increases Labor Demand, but is Flawed

The payroll tax cut is a big step in the right direction, but falls short in perceived permanency and regulatory relief.  Infrastructure for the sake of infrastructure makes sense, but for the sake of spending money as fast as possible asks for waste.  It is “paid for” only in the loosest sense of the word, intending to delay the offsets indefinitely.

 

Payroll tax cut:  I’ve repeatedly said the payroll tax is the best tax to cut to reduce unemployment.  For any business with up to roughly 100 employees depending on average wages, the Obama plan would cut their payroll costs by 3.8%.  That’s a big effin deal that will directly increase the quantity of labor demanded.  If labor is 3.8% cheaper, employers will consume more of it, the exact degree of which depends on several variables, namely how price sensitive the goods or services the business is producing are (thus the upper echelons of the economy that depend on discretionary or luxury spending should see a greater increase in labor demand than the more foundational levels such as food and fuel), the quantity of labor already being consumed (the price sensitivity of labor is much greater at the lower quantity spectrum of the demand curve, therefore small businesses should see a greater increase in labor demand than bigger businesses), and the long-run vs. short-run nature of it (long-run is far more price sensitive than short-run). 

 

It is on this last point that the perception of permanency is critical.  If employers perceive the tax cut as temporary, they are far less likely to make long-term hiring decisions based on it.  The intended change in behavior would be much stronger if this were presented as a permanent shift in the structure of the payroll tax.

 

Additionally, the payroll tax carries a hugely regressive regulatory component to it.  I was pushing for a full exemption of the first 100 employees to address this.  Conceding budget constraints, rather than the President’s half off of the first $5 million proposal, it would be far better to do a full exemption of the first $2.5 million.  As it is now, starting with employee #1, a business must comply with costly regulations associated with the payroll tax that necessitate either spending thousands of dollars on third party professional services such as payroll companies and accounting, or spend an inordinate amount of managerial time to do it in-house, all while exposing themselves to massive liabilities.  A full exemption would greatly increase competition, and competition increases total wealth, as well as more broadly distributes that wealth.

 

Infrastructure money burning a hole in the pocket:  When there is a rush to spend money, there is a rush to waste money.  The federal government has no business funding the construction of local schools.  Cinderblocks and cement don’t teach kids.  However, there is a bureaucratic infrastructure already in place to roll this out much faster than the traditional “shovel ready” infrastructure projects which is why it is being pushed.

 

Paid for???  Pushing it off on the “Super Committee” is the least of the sleight of hand here.  The plan is that the offsetting cuts or tax increases will come in the “out years,” after multiple elections.  As far as paying for it now, given that it will add to the deficit now, and given that virtually all deficit spending over 3% of GDP is being printed, this plan itself will be printed.  This distorts the real effects to the better for the upper income brackets, and to the worse for the lower income brackets due to the inherent repressiveness of inflation.

 

Far bolder and better would be to pay for it now by cutting defense spending and bringing troops home now, raising the eligibility age for Social Security and Medicare now, cutting federal pay and benefits now, cutting government contractors’ pay now, overhauling welfare to assure that while no man is made to live worse in a civil society than he would live in a state of nature, no man is made to live better without working than another lives while working now, and increasing taxes on those making over $250k/year now.  Failure to address these issues now cuts and runs from the entire "you can't have both" argument.  Economic policy is about making decisions.  Do you spend money on private consumption (full retirement benefits starting at age 65 and a welfare state that makes some better than those who work), or do you spend money on public capital investment (Hoover Dams and inter-state highway systems)?.  Do you spend money on war, or do you spend money on basic scientific research?  Do our young men carry guns in sovereign lands we have invaded, or do they build roads at home?  Do we give tax cuts that encourage more personal consumption, concentrated wealth and power, or do we give tax cuts that encourage business expansion and new hiring?  

By considering each one of these choices, one can see that even maintaining current levels of total taxing and total spending (not suggesting we do that, only pointing out for instructional purposes), one can achieve very different outcomes by adjusting the nature of the taxing and the nature of the spending.