The NYT reported on discussions in the Obama administration to implement a tax credit of $3,000 for companies that hire additional workers. The hope of course is that this will be a spur to job growth. Most studies show that labor demand is highly inelastic (this is why increases in the minimum wage have little effect on employment), so a tax credit that modestly decreases the cost of labor is unlikely to have much effect on employment. On the other hand, there would be many opportunities for employers to game this tax credit. The most obvious is simply bringing some jobs on payroll that are currently contracted out. 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. It would have been helpful if this piece had included some analysis of this tax proposal. The article also discusses the possible extension of the $8,000 first-time homebuyers tax credit. It would have been worth noting that this tax credit is likely to temporarily inflate house prices ($8,000 is approximately 4.7 percent of the median house price). That means that people who buy homes when the credit is in effect can expect to sell them at a lower price (inflation adjusted) assuming that the credit does not remain in place indefinitely. There was an enormous amount of misinformation about home prices distributed by the housing industry and the media during the bubble years. It would be helpful if the media tried to do a better job informing the public about predictable movements in house prices now.
--Dean Baker
