The Job-Subsidy Plan—Posner

The President is asking Congress to enact a one-year $33 billion job-subsidy plan. An employer would receive a $5,000 tax credit in 2010 credit for increasing his labor force by one person and an additional subsidy for giving an employee a wage increase greater than the inflation rate. The total subsidy would be limited to $500,000 per employer, in the hope that the principal recipients would be small businesses. I do not know why the ceiling should be expected to have that effect. Even big businesses like $500,000 windfalls. If a big business happens to be increasing its hiring or its wages, why wouldn’t it claim the subsidy?

 

That point to one side, and disregarding also the abundant possibilities of gaming the program, stressed by Becker, the proposal is unlikely to be effective because it violates the economic principles that ought to guide stimulus programs.

 

The theory of stimulus is Keynes’s, is (in my opinion) sound, and is as follows. If, because a high rate of unemployment creates pessimism about the economic situation, people increase their savings at the same time that business is reducing its investing—and that is our situation today—the government can by financing projects through borrowing put the inert savings to work (inert because businesses aren’t borrowing people’s savings). The projects require workers, so unemployment falls, and with it pessimism and the cash hoarding, by consumers and businesses alike, that pessimism induces.

 

With Keynes’s theory understood, it becomes possible to list the principles of effective stimulus:

 

1. The stimulus must be large in order to make a substantial dent in unemployment. The $787 billion stimulus enacted last February may have been too small; a $33 billion jobs subsidy is a drop in the bucket.

 

2. The stimulus must be implemented before recovery from a depression or recession is well under way—otherwise the government’s borrowing to finance the stimulus will slow the recovery by pushing up interest rates. (That is, at some point in the recovery, business will resume investing and so will be competing with the government for capital.) If enactment of the job subsidy is delayed in Congress, or if procedures for preventing the gaming of the program are cumbersome, the subsidy expenditures may come too late to do any good.

 

3. The stimulus must be targeted on industries, and areas of the country, in which unemployment is high. Like the $787 billion stimulus, the job-subsidy plan flunks this test as well.

 

4. Most important, a stimulus is designed to stimulate demand, not supply. The economic problem for which a stimulus program is a solution is insufficient demand relative to the economy’s labor and other resources. Because of overindebtedness and continued weaknesses in the financial system, consumers and businesses are reluctant to spend. Businesses are reluctant to hire (that is one aspect of their reluctance to spend), so unemployment is high and wages are stagnant, which further depresses demand. The idea behind the stimulus is for government demand to take the place of the missing private demand. Government “buys” new roads, in lieu of consumers’ buying SUVs, and contractors meet the government’s demand by hiring unemployed construction workers. The job-subsidy plan is not demand-focused, and so is unlikely to contribute to the economic recovery. Suppose a firm in a depressed economy sells 100 earth-moving machines a year, and employs 200 workers. If the government tells the firm it can save $5,000 on its taxes by increasing its work force to 201, the firm’s total costs will increase (by the wages and benefits of the additional worker less $5,000), but its revenues will not increase because adding a worker does not increase the demand for its product.

 

There is an enormous amount of idle productive capacity in the U.S. economy at present. There is thus a case, as liberal economists such as Paul Krugman keep urging, for further stimulus spending. The problem is that such spending is irresponsible unless coupled with a credible commitment to repay, after the economy recovers, the money borrowed to finance the spending. Not only is there no such commitment; at present the only realistic prospect is of staggering deficits stretching indefinitely into the future. As a result there is at present no stomach for additional stimulus spending. The government is reduced to impotent gestures, of which the job-subsidy plan is one.

Comments

[Indy]

Well, I'm in favor of a job-creation tax credit for what, I believe, are sound theoretical reasons. But I'll concede that my judgment may be clouded by the small bias inherent in being a soon-to-be-graduate who, so far, and along with my wife, are having no luck whatsoever in finding work.

I'll mention two things however.

1. First is the new difficulty in obtaining government work. State and local entities are almost all shrinking their workforces, or at best on a hiring freeze. And the federal government has definitely raised the qualifications required for many positions.

Take a look at USAJobs.gov and you'll see just how specialized one has to be to get one. There has been a dramatic change in the last two years which I conclude is clearly a response to the soaring number of applications, but which is nevertheless highly stressful.

My personal experience is at follows: The number of even lower-level positions - which I think could be done competently by any recent graduate with minimal on-the-job training - which now require at least one year of nearly *identical* experience *within* the government is quite disheartening.

Jobs that used to need a bachelors now ask for post-graduate degrees, like LLMs, in a way that in completely disproportionate to the duties of the position. This is especially frustrating since veterans like myself (deployments to Iraq and Afghanistan and a purple heart) are, theoretically, eligible for a slight hiring preference, but with such high requirements I cannot even enter the pool of competitors in order to take advantage of the "preference".

2. Second, while I am in favor of a jobs credit, I worry about when the government would, if ever, be able to withdraw such a program. What level of unemployment is "low enough" in the eyes of the public? How many millions of unemployed is tolerable once you've opened the door to government intervention in the labor market?

I think the likely answer is that, once enacted, the public will demand the government "do something!" unless unemployment falls below 6% at most - in the same way the markets ask for interest rates to constantly fall because growth is "fragile". The potential contribution of these interventions to a boom-bust or support-collapse-support cycle of employment is easy to see.

[Ted Craig]

Keynes' theory is out of date with economic reality. In the past, unemployment meant people were in dire straits. Most households had a sole provider and families lacked excess wealth to provide for non-contributing children. A factor in unemployment today, one which few economists seem to grasp, is many people, mainly young people, are making only a token effort to find employment.

[Matt]

Posner, you have made a major and fundamental error in thought.

You claim that there is a disconnect between savings and investment. That may occur in monetary terms, but not in capital terms. Every single piece of capital, labor, and land is owned by someone (labor being owned by the laborer). If savings are not being invested, this means that the cash is sitting idle, such as being stuffed in the mattress. This does not imply that a commensurate amount of capital is siting idle. It instead means that those whose cash is not idle have a greater purchasing power. Capital is not held idle just because savings are in the bank. If your analysis held, simply printing money (taking money out of the mattress) would increase wealth. And it would always increase wealth. But we know this is a fallacy and it just causes an increase in inflation. What you instead witness in a recession is a reallocation of capital.

The fundamental problem with your thinking is you are not thinking about the economy in barter terms. You are too deep into monetary phenomena and are not pulling back to make sanity checks.

[Thomas Esmond Knox]

What if the President said "This period has been a great lesson to us all. The prudent have prospered. The imprudent have not. All ye Citizens, take a good hard look in the mirror, and resolve to do better next time."

[N.E.H.]

The essence of any economic stimulus lies in the stimulation of "Aggregate Demand" (are you supply siders listening?). Hence, the Keynesian Response as quoted in Posner's "Job Subsidy" article. The Economy sours and contracts, aggregate demand falls and jobs are lost. But there is more going on than just this. There has been a systemic failure that has occured in the American Economy. That is the creation of two independant economies in the last twenty or thirty years. Such as some like to describe the distinction as, the "Main Street Economy" (where Production and Employment take place) and the "Wall Street Economy" (where Commerce and Finance takes place).

As for the "gaming" of such a program. Every program ever devised has and will be gamed. It's only human and institutional nature. But, simply because, it has the potential to be gamed, should not preclude it from discussion as a quick fix to our more than desperate situation we now find ourselves in.

If we are going to create a secure and stable Economic Order as opposed to the frothy, bubbly, boom and bust economy as has been developed; we need to return to basics and recreate an Economic Order that functions on the principle of the harmonization of interests between the Agricultural, Industrial, Commercial, Financial and Public intersts. A job subsidy program is only a band-aid.

[kevinearick]

The deficit is now $1.5 Trillion, and pressure to both pensions and tax receipts continue to fall fast. That’s some serious discharge. The result is backpressure against the external barrier to entry, job certification, its supporting mechanism, public “education”, and its root, replicative breeding control, which is the cancer consuming the system.

As many have no doubt figured, small labor has all kinds of ways to fire warning shots over the bow of Big Capital – reducing the voltage, separating the gate switch, tapping the inductor, drying out the capacitor, before the final step of tapping a new circuit, and leaving the old one to discharge through the load.

The more capital spends protecting the nexus, the faster it discharges. Infinite monetary policy doesn’t increase economic amplitude; it simply changes the scale to misdirect the uneducated observer.

The nexus cannot design or implement anything at an economic profit. All it can do, and all it has done for 35 years, is replace real productivity with financial leverage, to liquidate assets in a “secular migration to a service sector economy” – the financial cliff.

The point of this exercise is to make circuit development transparent, TO ENABLE INCREASED PARTICIPATION. Capital breeds economic slaves, hires the upper middle class to manage the farm, and then asserts that democracy is the best getting in the way of better. Small labor asserts that increasing democracy is always the answer.

51% return on the economy to unprotected labor is a non-negotiable item. Capital can pay government, union, and non-profit agents anything it wants, out of its 49%. By now, it should be obvious to everyone that these institutions all serve capital, not labor.

Bill Gates giving $10 Billion to the doctors for the purpose of “managing” economic slave populations is not reform, not by a long shot. The Haitians do not need capital “charity”; they need a real economy.

Those bred for loyalty to the debt-manufacturing machine cannot escape each other’s gravity. Greed works like a clock; wind it up, and watch it crash. Confidence in the unknowable is required to escape the black hole, because it serves the purpose of the universe, to grow.

Big Capital currently has no access to the emerging economies, and it is only going to get access if the middle class reorganizes to build the bridge.

[kevinearick]

The Volcker rule is like having a 12V battery, fully charged, sitting on the bench in the garage, when the electricity cuts out.

Of course the sharks circling each other, with no other food source, can't see that, and most others would waste the energy, to recharge their cellphones.

There's talking and there's doing.

[Obadiah Shoher]

A $5,000 one-year subsidy is too insignificant to affect a decision to hire additional employees. Those who intended to hire, anyway, will enjoy the subsidy.
Worse, the government urges employers to increase wages, which actually must be decreased in order to jump-start mass hiring. Recall that wages were frozen in Germany and even wage hike demands banned when it successfully battled the 1930s depression.

[Rafael Seekatz]

"If the government tells the firm it can save $5,000 on its taxes by increasing its work force to 201, the firm’s total costs will increase (by the wages and benefits of the additional worker less $5,000), but its revenues will not increase because adding a worker does not increase the demand for its product"

Isn't that extra worker wage supposed to drive further the aggregate demand, and as small bussiness account for an important part of the economy, it may actually start a positive influence in the bussiness cycle, unless of course you think the newly employed will save that money, but its hard to picture it.

[vimothy]

1, The US government issues dollar currency. What other commitment do you need?

2, The government deficit is the obverse of private sector net savings. Leaving aside the CAD, it is essential that it runs a deficit such that the private sector can achieve its desired savings rate.

[Martin Manges]

From a practical perspective of nearly 40 years working in product development for a major chemical company, we never hired an additional employee unless our present manpower was insufficient to meet our customer's demands. Period. The altruistic concept of hiring for the good of the monetary policy never, I repeat never entered into our calculations.

I have several friends who own small businesses and they adhere to the same principle. Mr. Obama's idea is consistent with someone who was never responsible for meeting a payroll with his own funds or someone who doesn't know the definition of PE ratio.

Furthermore, my neighbors (simple consumers), are deathly afraid of trillion dollar deficits. Until the economics of State rationalize, their surplus earnings will remain under the mattress.

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[sesli chat]

Posner, you have made a major and fundamental error in thought.

You claim that there is a disconnect between savings and investment. That may occur in monetary terms, but not in capital terms. Every single piece of capital, labor, and land is owned by someone (labor being owned by the laborer). If savings are not being invested, this means that the cash is sitting idle, such as being stuffed in the mattress. This does not imply that a commensurate amount of capital is siting idle. It instead means that those whose cash is not idle have a greater purchasing power. Capital is not held idle just because savings are in the bank. If your analysis held, simply printing money (taking money out of the mattress) would increase wealth. And it would always increase wealth. But we know this is a fallacy and it just causes an increase in inflation. What you instead witness in a recession is a reallocation of capital.

The fundamental problem with your thinking is you are not thinking about the economy in barter terms. You are too deep into monetary phenomena and are not pulling back to make sanity checks.

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[Jason]

I have a better solution. Why doesn't the Federal government consider "displaced employees (unemployed)" as a category under USAJOBS and stop giving preference to Federal employees and veterans fisrt. Based on conversation's I have had with family in the Federal government, they must consider a veteran even if another candidate is better qualified first. In addition, OPM is not qualified to review highly specialized professions (they are HR officials). Often the veteran is given preferance beforehand. My suggestion is to do the same thing for the roughly 9.7 million unemployed American's who cannot find a single private sector nor non-profit work (just read Brookings or U.S. Labor reports). T.R did a similar thing under his administration. It's time for the "federal frat club" to open the doors.

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You claim that there is a disconnect between savings and investment. That may occur in monetary terms, but not in capital terms. This does not imply that a commensurate amount of capital is siting idle. It instead means that those whose cash is not idle have a greater purchasing power. Thanks

[Columbus DJ]

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I am highly in favor of job credit. I bit worry about when the government would, if ever, be able to withdraw such a program. What level of unemployment is "low enough" in the eyes of the public? How many millions of unemployed is tolerable once you've opened the door to government intervention in the labor market? I wish everything will go fine.

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[Jobs In Manchester]

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