Additional jobs could be created more cheaply through policies that target job creation. Two options are revised versions of the New Jobs Tax Credit (NJTC) used by the federal government in 1977-78, and the MEED (Minnesota Emergency Employment Development) Program used by the state of Minnesota from 1983 to 1989.
The NJTC provided wage subsidies via tax credits to private employers who expanded their employment. The wage subsidy was equivalent, in 2008 dollars, to a little over $7,000 per worker per year. The program subsidized the hiring of 2.1 million workers.
Research evidence suggests that the NJTC increased U.S. employment by about 700,000 workers, at a cost per new job created of about $20,000 in today’s dollars.[6] These research findings are based in part on comparisons of job creation by businesses that knew about the NJTC versus businesses that did not. In addition, the design of the NJTC favored particular industries and small businesses, and these industries and businesses did relatively better during 1977-78. Finally, the timing of job growth in 1977-78 is consistent with NJTC having a significant effect.[7]
I have estimated that a revised NJTC, expanded to also subsidize non-profit employers, would increase U.S. employment by 1.3 million jobs. The estimated gross cost is $26 billion per year.[8] John Bishop has estimated that a differently revised NJTC, expanded to be more useful to large businesses, would create 1.5 million jobs at a cost of $55 billion per year.[9] Bishop’s estimates are more pessimistic because he assumes more employers take up the subsidy offer, and he bases his estimates on general economics research on labor demand. My estimates rely on prior experience with the NJTC, which suggests somewhat higher responses and lower take-up rates.
Suppose these directly created jobs have an employment multiplier of 1.5. Then my estimates imply that a NJTC would create 1.95 million jobs, at a cost per job of $13,000. Bishop’s estimates imply that a NJTC would create 2.25 million jobs, at a cost per job of $24,000.
So is there anything wrong with this plan? Minor subsidies to encourage hiring could lead to more consumer spending, which would grow the economy even more. And a massive program needed to create an extra 2 million jobs would cost $26 billion, which is about what we spend in Iraq in 2 months, and about 1/10th the annual cost of the Bush tax cuts.
So what am I missing? If this is such a good idea, why hasn’t it been done? I remember in college they had programs like this for those of us who qualified for financial aid. The state & federal government would pay about 2/3 of your wages, and a private employer would pay the rest. It was supposed to encourage hiring.
I’m too young to remember the NJTC, so I can’t comment.
However, there is at least oen rpactical problem right today. First, unemployment is being driven in part by uncertainty. Small companies especially don’t know and don’t like the many plans being proffered, changed, and withdrawn (at an alarming rate, I might add) on everything from carbon to healthcare to taxes. Any one of these could kill a small business, and with no knowledge of what might happen, they ain’t gonna hire nobody. Better to save money and simply restrict net sales than take on more risk.
Well that sounds nice. Giving companies $7000 tax credits for each new hire. About 1/3 of the money to pay for an entry level employee.
So what does this new employee DO? If the company wouldn’t have hired without the tax credit then the company probably didn’t need another worker. Sit at a desk and look out the window? Stand at a machine that isn’t running because there is no need for increased production and the warehouse is already full of stock? And the credit is for the first year of hire. The company needs to be able to generate income to pay the first 2/3 years salary and sustain a profit to keep the worker for future years.
So again, what does the new worker do? How does the company raise profits to pay for the worker? Business must increase, sales of goods or services must increase. Companies must NEED to hire more people. And corporate profits must increase to avoid a relapse into additional cutbacks later.
This is called Capitalism.
If increased sales of goods and services aren’t there, neither the money to pay the taxes that support the subsity nor the money to pay the salary exist. What increases demand for goods and services? Consumer availability of excess income. And you can’t artificially induce that by raising and spending taxes.
Without economic growth the government might as well pay the prospective employee directly to stay home.
Frankly, too - if someone gave me a subsidy of 20,000 or even 7,000 bucks per worker hired, I’d figure otu a way to exploit this. A lot. A hundred times a day.
A problem is that consumer demand is down due to the economy. So an attempt to put millions back to work might increase consumer confidence and create more consumers. If you give unemployed working class people money, chances are they will spend it.
And there are tons of problems we need to fix in our economy. We should revamp our energy infrastructure, invest more heavily into scientific R&D, update our healthcare system, update our general infrastructure (our roads, bridges, rails, dams, etc were very poorly rated by civil engineers recently), promote universal broadband. There are tons of problems that need to be fixed that will help our long term economic growth and national sustainability.
So there is not a shortage of productive work that needs to be done in the US.
Clearly if an employer is overstaffed today, this would not encourage him to hire, just as giving tax breaks won’t encourage him to invest in infrastructure which is already under used. However, if an employer has cut back already, and has seen signs of an upturn, this might encourage hiring a bit earlier than otherwise, since even an upturn below forecast could make a subsidized worker a good investment.
But Wesley Clark has the most important point, which is that sustained growth will never occur without an increase in employment. This could be a way to prime this pump. The cite shows this kind of thing is more effective than I thought it was, which is good.
I don’t really want to be the lone capitalist arguing on a liberal board where the question of; “What should we do about the profits of Industry X”, are regular threads.
The question I would ask you Wesley, and others, is how do you plan to get private enterprise interested in investing to fix the problems listed above?
Take scientific R & D for instance. If Big Pharma spends millions on research, and then tries to recover that investment back after a new discovery, well My God!, look at the profits they are making! This attitude discourages investment risk. Universal Broadband, well after industry develops a better system and technology we will regulate any chance to recoup the investment, hell government might just take over the whole industry. The Green Revolution will begin as soon as there is real money that can be earned AND kept without subsities.
Government really doesn’t have any money of it’s own. Somebody, somewhere must be creating wealth and profit so that the income of the government can increase too. It is basic to the whole idea of government.
The last Bank Bailout saved the banking industry somewhat, and then they kept the rest of the money. The people who spent the equity in things they owned are not bailed out and so are not risking spending new money. We have been told for years to reduce debt and not spend on credit, and when people start practicing that advice, it turns out to be terrible for the economy.
I really got a kick out of Fed chief Ben Bernanke yesterday. He said that the people of China need to help the economy by spending more. What?, what?
Again Wesley, what are the newly hired workers going to produce, that makes it seem like a good idea for a corporation to hire lots of them? Growth cannot be sustained by government money, it has to be sustained by corporate profits that not only feed the growth of this new hiring, but create wealth that pays taxes to repay the initial stimulus of the tax credit, (reduces the deficit).
That is the trillion dollar question.
Disclaimer: I don’t know the answer either, am not blaming the Obama or Bush administrations or picking on Wes.
“Government intervention is not a sustainable way to grow the economy. And government regulations or progressive taxes will intimidate businesses out of hiring new workers.”
To a degree, I can see your point. But here is what I don’t agree with in that statement.
Renewable energy (as an example) is only profitable because government investment and subsidies carry it until it is self sufficient. The biggest problem with Laissez-faire capitalism is that there is no long term thinking, no concern with society as a whole, no concern for sustainability, etc. It is just short term profits for an immediate group. That serves a good purpose (if not for the profit motive, new kinds of electronics wouldn’t decline in price by about 90% after the first few years). Laissez-faire capitalism is why the economy collapsed.
However government does serve a role. Wind power and solar power have declined in cost by nearly 90% in the last 3 decades, in large part due to government investments or research done at public universities. If you take government investment out, then these technologies would not be cost competitive. Wind power is now growing at nearly 20% a year, meaning it doubles production every 3 years or so. However it took years of public investment and public subsides to help it reach that point.
As far as big pharma, a good part of pharmaceutical research is done by the public sector.
Angell is a critic of the pharmaceutical industry. With Arnold S. Relman, she argues, “The few drugs that are truly innovative have usually been based on taxpayer-supported research done in nonprofit academic medical centers or at the National Institutes of Health. In fact, many drugs now sold by drug companies were licensed to them by academic medical centers or small biotechnology companies.” The pharmaceutical industry estimates that each new drug costs them $800 million to develop and bring to market, but Angell and Relman estimate the cost to them is actually closer to $100 million. Examples are imatinib (Gleevec), zidovudine (AZT) and erythropoietin (Epogen). An unpublished internal NIH study in February 2000 of the 5 top-selling drugs in 1995 (Zantac, Zovirax, Capoten, Vasotec, and Prozac) found that 16 of the 17 key scientific papers leading to the discovery and development came from outside industry [6]. In 2004, she published The Truth About the Drug Companies: How They Deceive Us and What to Do About It.[7]
The reality is you need government for these programs (infrastructure), because only government is capable of the scale, long term planning or concern for society as a whole. Private industry generally is not capable of that.
Now how will investments in these fields help companies long term? If we improve infrastructure it will lower business costs. Improved energy and energy efficiency means lower costs for businesses. Improved infrastructure means lower transportation costs. Improved broadband means more telecommuting. More science means more productivity. Health investments mean (hopefully) lower health costs for employers.
Government can create profit. By improving infrastructure, communications, health, R&D and various other fields productivity goes up and expenses can go down. Rural electrification, the interstate system, NIH or the public education system are all systems that have created profit by improving productivity.
Growth is sustained by consumption of the goods and services that companies provide. By hiring new people with subsides, you will increase consumption and create jobs indirectly as well. The investments have a multiplier effect.
I automatically assume anyone who disagrees with me is picking on me. So far it has worked out great.
I hope you realize that liberalism and capitalism are not at odds. Pure capitalism causes all sorts of disasters. With the right amount of regulation, we can get both the benefits of capitalism while avoiding much of the downside.
Have you ever been involved in industrial research? I have, and I have managed it also. First, the way to cut drug prices is to cut the marketing costs of Big Pharma, which are significantly greater than the R&D costs. As Wesley said, Big Pharma has done an awful job innovating lately. They mostly buy new inventions from start ups.
Slightly better drugs and inventions come from industrial R&D. The real innovations come from research which is not driven by the bottom line. In the good old days monopolies and effective monopolies could fund that. That has pretty much gone away now. Microsoft is left, and I wonder what they are doing, since not much of interest has come out of the place. I have first hand experience that as competitive pressures increased on Bell Labs and IBM researchers were pushed into shorter term research with immediate benefit, and most of it was worthless. So today if we did not have government funding of universities to drive basic research, Big Pharma would be in big trouble pretty soon. Obama is increasing research funding, and it is about time.
In this regard government can be seen as a thing that takes some of our money, pools it, and invests it for us. If the jobs program built demand and got the economy going again, the country as a whole would see a payoff in increased employment and better profits far exceeding the investment. That goes for research funding also.
Why are they not spending? Many are not spending because they are unemployed, and the rest are not spending because they are worried about being unemployed. If the unemployment rate truly shrinks, and the pool of un- and under-employed people shrink, you’ll see a big turnaround. A lot of the debt accumulated came from people going into debt and into their supposed equity to make up for the lack of growth in real wages during the Bush years, encouraged by Greenspan’s low interest rates. If businesses had put more of the money given to execs into worker pay, they may not have gotten into the mess they are in today.
This surprises you? It is well known that the Chinese government pushes exports and discourages imports and internal spending. More imports would cut the trade deficit
and help grow our economy. We do have competitive advantage in some areas, but sales there are cut by the lax attitude towards piracy. If pirates hijacked boatloads of TVs and DVD players and sold them on the open market, with the US government turning a blind eye to it, how would they feel?
Econ 101 - profits don’t spur hiring, demand spurs hiring. Say a company in a mature business sells 1,000 widgets for $100 profit each. They have just the right number of people to make them. Demand if flat. Now, say for some reason or other they can make $150 each on them, with no impact on demand. Do you think they should hire? What for? Now, if demand went up by 50%, with the same $100 profit, they’d be hiring like crazy.
Do you think the oil companies went into a hiring frenzy when their profits increased? If they did, I never heard about it, and they were smart to have avoided it.
As for when to hire, I gave that in Post 6 already.