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.

If the company covers the "new" employee with health insurance as a result of hiring them, it might not increase real employment (I agree with you on this), but it should get more people covered with health insurance than otherwise. But, since health insurance is such a high proportion of labor costs, it would probably not be much of an incentive. Oh, never mind ... :-)

As a former personnel manager I can say without qualification that tax incentives to promote hiring are useless. We make note of them and claim them if we can, but positions are created based upon work demands and profitability. The tax incentives are nothing but gravy.

I will get that $8K from the home-buyer credit. Had absolutely nothing to do with my decision to buy my place. That's just a little more slop for the hogs in the real estate industry.

Good post politicians are good at and interested in one thing getting elected. They are select for this ability. These silly policies play well to the electorate.

fxt said: "I will get that $8K from the home-buyer credit. Had absolutely nothing to do with my decision to buy my place. That's just a little more slop for the hogs in the real estate industry."

Actually, I think the person you buy from will get most of that $8K; because of the incentive, you'll pay more than you would have without it. That credit is ostensibly for the benefit of non-homeowners, but almost certainly is mostly a subsidy for current homeowners, including developers which own unsold homes.

Great post. I really appreciated the comments on the low elasticity of employment.

Unfortunately we are in the midst of an unemployment debacle that will hold back true recovery. My best guess is that the true unemployment rate is somewhere north of 12% or roghly 1 out of 8 workers. What we need are policies, plans and projects that will provide work for those unable to find jobs.

It seem that the Democrats in Congress are not up to the task. Frankly, I don't expect either party to take timely action.

Why is the current US labor market in such sad shape? The years from 2001-present have had ZERO net job creation. The ridiculously low job creation was masked by an increase in government employees and more importantly by an unsustainable increase in construction labor. Too many too big houses were built and construction labor has collapsed. This exposes the lack of job creation as a result of policy failure from 2001- present.

Why did labor (job creation) policy fail during this period?

It is very important to answer this question because our labor market must make up for a decade of policy failure. A large failure was trying to protect the status quo of entrenched special interests (BigOil, Telecom, auto, BigFinance, etc) and creating barriers or failure to facilitate innovation.

Analysis of the current crisis should not stop with failure of the financial sector. It needs to be recognized that the labor market failed during this period and the problems were papered over by a housing bubble. The collapse of the housing bubble left the failure of the labor market exposed.

It is nice that Obama is looking at ways to correct the failure. More tax credits is not the answer.

Why has labor (job creation) policy failed during from 2001- present ?

It's worth noting that the tax credit for new home buyers isn't the only thing raising house prices. Have you estimated the affect of the mortgage interest tax deduction on home prices? An $8K credit is more equitable than the interest deduction and will only raise prices once. I'd rather they hold onto the credit and put a ceiling on the interest deduction than eliminate the credit and hold off on the ceiling. No tax credit for jumbo mortgages would be my criteria.

"That means that people who buy homes when the credit is in effect can expect to sell them at a lower price (inflation adjusted)..."

But actually if there is high inflation they could be big winners, which brings up an interesting point - are all those who are predicting high inflation, because of deficits or otherwise, now buying houses? If so that could be a significant boost to prices.

@skeptonomist

re all those who are predicting high inflation, because of deficits or otherwise, now buying houses? If so that could be a significant boost to prices.

Very good point. I just very nervously bough a little DGZ. I am betting that fears of inflation are overblown and anyway that Petrol, REITs and some foreign stocks are better hedges against inflation. I have always had doubts about gold as a store of value and it looks to me like it is in bubble territory.

Have you considered DGZ?
Revealed preference and all. :-)

"...assuming that the credit does not remain in place indefinitely. "

Dean! Was there ever any Federal real estate industry subsidy, either direct or indirect, that was repealed/rescinded after once being put in place? Indeed, was there ever any that wasn't made richer over the years? Interest deductions were extended to second homes, tax-free levels of capital gains were increased, 1031s appeared, ...

Already there's talk of increasing the tax credit t0 $15,000. Since they're running out of "first-time" buyer demand to pull forward, it'll soon be extended to everyone. And then to "investment" buyers. And then they'll need to increase it to $25,000 or $30,000. Will we see it doubling every year?

Bakho:
Excellent post, and I'll take a stab at answering your question:
Why has labor (job creation) policy failed during from 2001- present?

It starts with the selling of a myth, the adoption as policy of the completely erroneous idea that free trade necessarily creates prosperity.

It doesn't. If it did, Latin America would today be a huge middle class paradise... to day nothing of the U.S.

In reality, this myth was promoted as 'economic theory' in order to provide the political cover so that American corporations could close domestic manufacturing operations and move them to cheap-labor and low social/environmental cost countries... arguing that they were exporting the 'low wage' jobs so that America could specialize in the high-wage high innovation jobs. Remember that argument?

Once they established the belief in that myth, the race to China and other cheap low controls countries began in earnest, gutting American manufacturing. In fairness, once the myth became 'fact', companies were forced to either move, close, or mechanize to a degree that the end result was the same... elimination of jobs.

Indeed, the only way an American based manufacturing company can survive, given the competition from overseas, is to become super "productive". Robert Reich has spoken to this trend, the downsizing of manufacturing due to robotization and mechanization, both brought on by allowing low-cost companies to export thier goods to the richer market countries without any tariffs that might protect the businesses and jobs that remain.

The answer, in short, to your question, is that job creation is related to good trade policy, and it is the trade policy that is built upon a myth of 'free trade'. Until that is addressed, there will be NO new jobs created in the US, the situation, as you point out, that we have endured now since 2001.

Sid, I don't think that is the entire story. Manufacturing jobs are going down the same way agricultural jobs decreased in the 1920s and 30s. WWII employed much of the dislocated labor. However, after WWII, the GI Bill passed. Instead of trying to return soldiers to the Ag sector, they had access to college education and the US greatly expanded its university system. The training was supported as a thank you to veterans. The broadened our economy and created jobs and prosperity.

Today, we have similar dislocation as the mfg sector sheds jobs. Jobs were shed under Clinton, but no job creation was greater than job loss.

Over the past 8 years we have had some bone headed policy that stifled new job creation. The policy failure was masked by the construction jobs in the housing bubble.

Bush energy policy was to allow BigOil to collect record profits rather than use excess labor to rebuild our electric grid for new technology. Protection of the status quo special interests. High oil prices collapsed the US auto industry.

The US has fallen behind on broadband access. How did that happen? Bush Telecom policy allowed companies to collect rents by controlling access rather than requiring the industry to make money through innovation. Immigration policy cut off the flow of the best and the brightest and made certain that many new start ups would happen in countries other than the US. NCLB was passed but nothing done to lower class size. It was never funded. Instead we gave huge tax cuts to the wealthy.

US job creation policy and the reason why it failed during under Bush is worthy of study, because it needs to be reversed if we are to move forward.

Jobs don't just happen. The economic climate has to be favorable and governments can either facilitate job creation or erect barriers. Why would barriers be erected? To protect the status quo and the special interests.

3 points that should be considered:

1. There is empirical evidence that the 1977-78 New Jobs Tax Credit was relatively cost-effective in creating jobs. In today's dollars, the credit induced one new job for $20,000. This is so even though only one out of three jobs subsidized by the 1977-78 NJTC was actually induced by the credit.

2. You don't need to have a large response of demand to wages to get an employer tax credit that would create jobs cheaper than most fiscal stimulus measures.

3. As I'm sure Dean knows, theories vary on why the minimum wage does not have large effects upon labor demand. For example, one theory is based on imperfect competition in the labor market. Under such theories, a higher minimum wage may actually increase employment, but employer wage subsidies will also increase employment.

Throw the long bomb and enact Phelps wage subsidy plan ($ an hour tacked onto the minimum wage tapering down as the wage increased to the median).

Beyond that, Canada's job sharing scheme is pretty clever-- drop one or two days a week, and the government pays you the unemployment insurance equivalent for the dropped days. So you'd end up working 60% of your hours for 80% of your usual salary.

Tim,

I have never been impressed with the imperfect competition story since it still only works if you had above normal profits in the industry. This doesn't seem likely in the restaurant industry and other major employers of low-wage workers.

How silly is trying to stimulate job growth while letting state and local government fire teachers ?

Mr Krugman has it right:

"According to the Bureau of Labor Statistics, the United States economy lost 273,000 jobs last month. Of those lost jobs, 29,000 were in state and local education, bringing the total losses in that category over the past five months to 143,000."

http://www.nytimes.com/2009/10/09/opinion/09krugman.html?scp=4&sq=education&st=cse

Failure is the mother of success. - Thomas Paine