Yesterday, I briefly noted the removal of a $3,000-per-job tax credit that had initially been part of the stimulus package. Economist Tim Bartik turned up in the comments with his take on the issue, which seems worthy of promotion:
Obama's decision to drop wage subsidies for employers is not surprising. Politically, employer wage subsidies tend to be disliked by both conservatives and liberals. Conservatives dislike the government interfering in individual employer's employment decisions. Liberals dislike the possibility of windfalls for large corporations.
However, there is considerable evidence that some form of revived New Jobs Tax Credit could boost employment at a reasonable cost. I review the evidence in a memo from October 2008 at http://www.upjohninstitute.org/Bartik-NJTC-proposal.pdf . The original New Jobs Tax Credit of 1977-78, equivalent to $7,000 per job in today's dollars, may have created as many as 700,000 jobs in that period. The estimated cost per job created of such jobs tax credit proposals is about $20,000 per job even without counting multiplier effects. Estimates suggest that the bang for the buck of such proposals might be in a range from $4.00 to $8.00 in GDP generated per dollar devoted to this tax credit. This is well above the bang for the buck for the stimulus proposals considered by Mark Zandi at Moody’s Economy.com. All of the spending and tax cut stimulus programs he considers generate less than $2.00 of GDP per dollar of stimulus.
As far as I can tell, the only real constituency for employer wage subsidies is from a somewhat eclectic group of economists. Employer wage subsidies as a way of boosting employment have over the years been endorsed by economists such as Nobel-prize winner Edmund Phelps, Robert Haveman, Dani Rodrik, Dan Hamermesh, and John Bishop. However, employer wage subsidies are controversial among economists. Some of the debate among economists over employer wage subsidies has recently appeared at the Tax Policy Center’s blog, for example at http://taxvox.taxpolicycenter.org/blog/_archives/2009/1/9/4051427.html.
I wonder if some type of New Jobs Tax Credit could be revived if it were limited to small business and non-profit organizations, and made considerably more generous than Obama's $3,000 credit. Small business is a more popular group to subsidize. There is also some argument that a wage subsidy could be more useful for expanding small businesses that have cash flow problems. And a very generous subsidy to non-profit organizations could be viewed as a form of public employment, which might appeal to some liberal groups. Given that we appear to be searching for useful ways to spend additional stimulus money, devoting $25 billion to a program to encourage small businesses and non-profit organizations to add jobs might still at some point prove a useful component of an economic stimulus package.
Perhaps a limited and targeted program of jobs tax credits would work or at least avoid becoming a boondoggle; it's certainly an interesting idea. I'd read the debate Bartik links to here to get an idea of why the idea is controversial among economists. Nonetheless, as Barack Obama says, all ideas are on the table (at least until they're off), so here's one more policy tool for your consideration.
-- Tim Fernholz
