this looks like a job for... tomorrow!

My Naive Plan to Put America Back to Work

Disclaimer: I am a computer programmer, not an economist, politician, or even a fancy space chicken lawyer. Read at your own risk.

Where We Are

The Department of Labor recently released their unemployment figures for July. Currently we stand at 9.1% unemployment, which is roughly 13.9 million people unemployed. This is pretty much where unemployment has stagnated for about a year.

What We've Tried

We've basically tried 2 things, increasing government spending and decreasing taxes. Both were part of the "stimulus" bill passed. Of the $787 billion stimulus, $507 billion was dedicated to spending (though not all of it ended up getting spent). The other $282 billion was dedicated to tax cuts.

The stimulus bill was likely pivotal in halting the 2 year trend of unemployment going up, but didn't do much to put people back to work. One problem with increased spending and tax cuts is that they are indirect methods of creating jobs. The government buys more goods and services, hoping businesses will need to hire more workers to fulfill new demand. Cutting taxes is pretty much the same, hoping that more money in consumers' and businesses' pockets will cause them to buy more, creating new demand.

My Proposal

My proposal would be to *directly* influence private sector hiring. Instead of giving more money to consumers and businesses hoping it will influence hiring, let's flat out give businesses money for hiring employees.

I suggest that the federal government pay 50% of the cost of any additional employees a business hires for 2012, and 25% of that employee's cost for 2013.

At first glance, that sounds like that would cost our government a fortune, but it actually would be relatively cheap and effective. Let's assume the average cost of a new employee is a generous $60,000 (salary + benefits). For 2012, the government is going to pick up half that amount: $30,000. We currently spend roughly $200 billion per year in Iraq and Afghanistan, so for 1 year, let's spend that much on putting America back to work.

For $200 billion at $30,000 per employee, we could pay for creating 6.67 million new jobs, which would reduce unemployment to the normal rate of 4.8%. Naturally, this plan will cost us a $100 billion in 2013, for a total of $300 billion, which is less than 2 years of wars and less than half the cost of the stimulus.

One can also assume that the actual cost easily be much lower, as each new employee is now contributing income tax, social security tax, and medicare tax to the government, and is no longer being paid unemployment from the government.

Benefits

There are several benefits to this proposal.

- First off, it is increasing private sector hiring, not public sector. The plan doesn't expand the headcount of the federal government, so we aren't creating jobs that are going to continue adding to the federal budget year after year.

- Secondly, it's not a giveaway for businesses. By requiring a 50% investment from the private sector, we are giving businesses a vested interest in creating useful, productive employees. They aren't just gorging on free labor for a limited time.

- Third, it's a temporary, limited cost to the government. 50% for year 1, 25% for year 2, 0% for year 3. Will there be businesses that lay off their new employees after the 1st or 2nd year is up? Sure, but probably not as many as you might initially think. It's not like these employees were free and now they cost 100%. Because businesses were already themselves investing in these workers, if they're worth keeping, the 25% is going to be worth it. And even if the employees get laid off, they at least spent a year or two participating in the private sector, paying taxes and growing the economy, rather than sitting around on unemployment.

- Finally, it only costs money if it's effective. If businesses don't think it's worth it to hire new employees at half cost, then the plan doesn't work, but it didn't cost us anything. However, I think there's plenty of employers who are on the fence about hiring who would jump at getting new employees at a discount.

Errata

Yes, you have to carefully craft the bill to enforce actual new jobs, not playing with numbers like firing 10 people and then rehiring them back as "new" employees. If your headcount was 50 at the end of 2011, then only headcount over 50 would be creating new jobs.

The bill would probably have to be introduced and passed rather quickly. Once the bill is introduced, people are going to freeze their hiring until the bill goes into effect. Maybe the initial headcount date is set at a date before the bill is introduced, and the 50% will be retroactive to that date.

Obviously you would need loop-hole-ologists to carefully craft a bill with the desired results, but that's one job we probably have an abundance of in DC.

17 comments:

Thorton said...

You are on the right track of lowing the barrier to hiring employees. However I believe that there's an error in your assumptions:
We've basically tried 2 things, increasing government spending and decreasing taxes

The decrease in taxes came in the form of lower Federal Income Tax. However, most state income taxes and sales taxes and corporate taxes have gone up. Saying that taxes have gone down is misleading.

If instead of creating more red tape and making taxes more complicated by having the government pay for the cost of hiring new employees, if they just lowered the taxes employers pay on their employees, it would accomplish the same thing and be much more simple and transparent.

Refactor the system, don't add another hack.

jpobst said...

@Thorton

Unfortunately, the federal government cannot control state taxes, though I also don't think I've heard of any states raising income taxes during the past few years.

Lowering the taxes employers pay to the federal government is both indirect and permanent.

It's a tax break for businesses that is not tied to new hiring. It still falls in the category of "give them money and hope they do what we want them to do with it". They rarely do what we want them to do.

Also, it is a permanent cost to the federal government in the form reduced tax revenues forever, instead of a onetime cost of ~$300 billion.

None of the employment taxes have changed from back when we were at "full employment", so they aren't causing the problem.

It's a temporary situation caused by a the recession. Our solution should be direct and also temporary.

Allyson Hodges said...

You are brilliant. The end.

Thorton said...

I'm curious, if the recession caused the unemployment problem, what caused the recession?

jpobst said...

Here, I googled it for you: :)

http://en.wikipedia.org/wiki/Causes_of_the_late-2000s_recession

I'm sure your point is that as the economy began to retract, people lost their jobs and no longer had buying power, causing reduced demand, causing more people to get laid off, etc. The "spiral" effect. Which is of course correct.

However I don't think it validates your initial point that excessive employer taxes are related to stunted hiring. Employer taxes have remained the same for nearly 35 years (1977 for SS, 1954 for Medicare), and most of those years have been pretty good, so I don't think they are what caused the most recent unemployment.

Matthew Higgins said...

Let's assume the entire point of what we are trying to accomplish is 1) stimulating hiring and 2) hoping that the hiring leads to company growth and in turn overall growth for America. Most companies don't have the cash flow to add employees, albeit at 50%. Therefore, to accomplish the "fire sale hiring", they will need to take out a loan. Most private companies are small, so the hiring of the employees will merely be a sunk cost in the beginning with the hope of having more manpower for a short period of time at a reduced cost which in theory helps grow the business. The reality is growth in today's market is a lot of luck, therefore most companies that would even attempt this "fire sale" hiring would probably just end up taking out a loan, hiring more employees than necessary, not increase their overall business, and eventually have to fire the same employees they have hired. One exception to this rule would be any company that sells products that contain the letters I, P, & D.

jpobst said...

Obviously it's just speculation, but I bet there are several companies out there who are on the fence about hiring an additional person or two. This could be the incentive they need to take the plunge.

I highly doubt it would result in 6.67 million new jobs. But even 1 million is certainly a significant number of new jobs.

And as the proposal points out, it only costs us if it works.

cnoble said...

quite the ingenious plan.. obviously, there are probably some issues such as the fire/re-hire loophole that would need to be plugged which you suggest, but i say give it a shot! what's a couple hundred bills!

even if the unemployment rate only went down a couple of percentage points due to mr higgins' point about some companies being unable to foot the extra 50% of a salary, i would be incredibly intrigued to see what a stimulus that directly affects "normal" consumer spending would have on the economy.. most of the previous stimulus was targeted at the top of the economic food chain (i.e. banks and industry).. this stimulus and the additional investment from business would go directly to people who need the money to pay for food, housing, cars, and all sorts of everyday consumer spending which is clearly what our economy thrives on..

it's a plan that is so simple it might do some real good to help a complex problem.. again, it's almost worth the cost just to see if it would work..

Anonymous said...

A scheme very similar to the one you proposed was implemented in Estonia during the 2008/2009 recession. (along with aggressive government budget cuts). Estonia has had a pretty decent economic recovery, but my personal opinion is that it's not because of this measure.

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Thorton said...

- I didn’t say the tax reduction had to be permanent (very little ever is in the government).

- I didn’t say to reduce employer taxes in general, just that taxes they pay on their employees. You suggested having the government pay for new hires, I suggested reducing the tax the government puts on employers for its employees. Both reduce the barrier to employment, they just do it differently.

- This “temporary” unemployment problem is the longest run of high unemployment in the last 60 years (if not ever). In addition, there has been an overall increase in the average unemployment for the past 60 years. Don’t call it temporary until it’s over.
http://www.google.com/publicdata/explore?ds=z1ebjpgk2654c1_&met_y=unemployment_rate&tdim=true&fdim_y=seasonality:S&dl=en&hl=en&q=us+unemployment+rates#ctype=l&strail=false&nselm=h&met_y=unemployment_rate&fdim_y=seasonality:S&scale_y=lin&ind_y=false&rdim=state&ifdim=state&tdim=true&hl=en&dl=en

- It is incorrect that employer taxes have remained the same. Since 1950, SS taxes have increased by a factor of 5 and more than doubled since 1960’s rates.
http://www.ssa.gov/oact/progdata/taxRates.html

Besides, merely looking at SS and Medicare isn’t the only tax employers pay. There are many other taxes that have been put onto employers (and people):
http://www.boe.ca.gov/sutax/taxrateshist.htm
http://www.huffingtonpost.com/2011/03/11/amazon-ends-illinois-affi_n_834561.html
http://www.dallasnews.com/business/headlines/20110210-amazon.com-shutting-irving-office-over-tax-dispute.ece
http://www.willisms.com/archives/texaspropertytaxes.gif (Note: CA has been trying to increase property taxes for decades, they were (sort of) capped in the 50’s).
http://www.taxpolicycenter.org/taxfacts/displayafact.cfm?Docid=161 (Note capital gains appears to be decreasing over the past 10 years, but will jump back up to an all-time high in 2013)
http://en.wikipedia.org/wiki/Capital_gains_tax_in_the_United_States
I can find more, but hopefully you get the idea; historically and overall, taxes are not going down or even staying the same.

- I asked what you thought the cause was so that we could discuss a solution that attacks the problem. From the historical trend of unemployment, I don’t think it is temporary or even getting better (when averaged over the past 60, 30, 20, or 10 year; arguable level, but high over the past 30 years). Thanks, for pointing me to Google; obviously that wasn’t what I was looking for. There has been a strong correlation to the raise in taxes and the increase in unemployment (I’m not claiming causation, just pointing out a correlation). If there is another correlation, I am interested in knowing about it (hence why I asked). You claimed to have a solution to unemployment, I assumed that meant you had an idea about that the cause.

Marek Sieradzki said...

You got manipulated by statistics. Unemployed is defined by "not looking for work" (more or less). Therefore amount of unemployed people can be (and is, 2x) significantly higher than "unemployment level".

"My proposal would be to *directly* influence private sector hiring. Instead of giving more money to consumers and businesses hoping it will influence hiring, let's flat out give businesses money for hiring employees. " That's silly. It's really, really naive to extreme degree. Where does money that govt has get from? From effective businesses that make profit, their employees, clients and so on. Government isn't able to collect 100% of tax amount and spend it without incurring a cost.

You're effectively asking govt to take money from you, and spend 90% back on you.

Furthermore you're being exploited or exploit the broken window fallacy. You don't see potential effects that could happen if money had been spent by private enterprise.

I don't want to comment anything else because it's really long story.

jpobst said...

@Marek

I am well aware that actual unemployment is higher than 9% (though 2x is just a guess). I don't think that makes my proposal less interesting. In fact, it makes it more imperative that we do something to try to fix it.

I'm not sure I understand the rest of your comment. I never suggested that this money would be free. It would of course temporarily add to our deficit, the same as any other spending or tax cut plan would.

This isn't money that we are going to go take from private enterprise and redistribute. This is deficit spending, pure and simple. It's the same thing we've propped our economy up with for the last 10 years, it's just my opinion that this is a more targeted approach than things we've tried before.

jpobst said...

@Thornton

- I would argue the opposite. Very few tax reductions in recent years aren't permanent. See Bush tax cuts and capital gains cuts.

- As you state, both methods reduce the barrier to employment, but one does it in a way that doesn't necessarily increase hiring and destroys Social Security and Medicare. The other you only benefit from if you hire additional workers. I think that's my main point, both plans *may* stimulate hiring, but mine only costs us money if it works.

- I see a graph that oscillates regularly between 4% and 9%. There's been ~7 spikes on unemployment during that time that came back down, I think it's reasonable to assume the same will happen again. (And the slope of the graph is indeed currently negative.)

- Ah, Wikipedia failed me on that one. So employer taxes haven't changed in 20 years instead of 35. Thanks for correcting me.

- All those taxes are state taxes. If a business doesn't want to pay them, there are other states to choose from. (Frankly, I don't see how any businesses afford to be in CA, yet businesses continue to flock there instead of cheaper states.)

The exception is capital gains, which I highly doubt won't be renewed *again*. My guess is the majority of business income is based on work, not investment.

- I think this where I have not been convinced. I don't see *any* correlation between taxes and unemployment.

The graph shows the cyclic nature of unemployment (and the economy in general). Just because the last point is higher than the first point doesn't mean that it's worse now in general that ever. The period from 1990-2008 looks no different that the period 1955-1973. I do not see a "steady increase" in unemployment.

I am also not convinced that corporations pay more taxes now than they did in the past. Payroll tax definitely increased up until 1990 as you pointed out.

Corporate income tax seems to be down to the lowest level in 70 years:
http://www.taxpolicycenter.org/taxfacts/displayafact.cfm?Docid=64&Topic2id=70

As I said, I fail to see a steady increase in unemployment or a steady increase in corporate taxes, so I do not see a "strong correlation".

Marek Sieradzki said...

My point more or less was:
a) government takes $100 (issues debt or collects it from taxes or issues debt and inflates money supply)

b) people see government spending $100 on project A or B or C (with different payoffs)

Let's say that A=social benefits B=war C="green" energy.

3 issues with it.

1. To get $100 you need to collect $110 debt/taxes because government incurs costs.

2. $100 on normal energy would get you twice the Joules for same price. $100 on people working would get bigger payoff (in wealth created, for instance utility of items manufactured) than $100 on benefits.

3. Politicians tend to maximize political payoff from money spent not the utility payoff (even if they could compute it). For instance what politicians call toxic assets and buy in massive amounts are simply assets with worth = $0 according to market.

In other words I'm saying that your assumption (let's give it to govt and think later) limits payoff from the start.

Other off-topic remarks:

I don't get the idea why anyone would lend to American government. Why would I as an investor want to fund let's say a job in US? Chinese have pegged their currency to USD for 30 years (correct me if I'm wrong) but if they unpeg it all prices of Chinese goods will rise dramatically while Chinese afford more.

Oversimplifying it I'd say why should Chinese girl that makes $10 trousers 50+ hours per week have her money taken by government to invest in American bonds to keep currency peg and that Americans can buy more of Chinese goods? Customer that can't pay for your goods isn't much of a customer. (ignore specific details, they're at most for illustration purposes, I meant insane money/work flow here)

You didn't see steady increase in unemployment in 1990-2008 because Fed kept rates low. That made credit cheap and made projects that are unsustainable in long term possible in short one. How do they end? They fail, bankrupt and fire employees.

Raven's Surprise said...

I have an addendum more than a comment. If we could be more concerned with the results than the stimulus, then we could move beyond the "if this, then "A", if that, then "B" concept. The current choices haven't produced the "desired results". What you suggest is more than worth a try. It certainly can't be more expensive... And isn't the bottom line still human beings?

Thorton said...

Sorry to take so long replying.

- “I see a graph that oscillates regularly between 4% and 9%. There's been ~7 spikes on unemployment during that time that came back down”
You don’t notice that the valleys are consistently higher than the previous ones, and the peaks are consistently higher than the previous ones? In any case, if you do a trend line on the data, it reveals an average increase of 0.04% a year. Over 60 years that’s 2.4%. In addition, if you do an exponential trend line, you’ll notice that the rate of increase is accelerating.
Even if you try to cook the numbers by starting the trend calculation at the high point in the 50’s and ending at the low point in the 2000’s, you still get an increase of 0.02% a year. An exponential trend line still shows an acceleration. If you look at the history over the past 60+ years, the rate of unemployment is increasing.

- If you note the largest spike in unemployment in the early 1980’s which quickly dropped after the Regan tax cuts, and ultimately led to the 1990 low you mentioned which was similar to the 1950s.

- In addition, you still haven’t answered the question of what you think the cause of this longest lasting rate of high unemployment is. Also, how having the government pay for new employees manages to overcome that problem. I’m happy to consider another factor that correlates to unemployment. I actually think there is causal factor out there that drives unemployment. I’m not sure what it is, but I have a feeling there is something. Please help me figure it out.

- In any case, taxes aside, no matter how you try to draft a plan for having the government pay for new employees it will create an artificial reliance on the government and pit existing employees against new employees. It’ll be impossible to build in safeguards to protect existing employees and taking money just to give it back is not good economics. Instead, I suggested reducing the burden the government puts on employers for its employees (all employees). I did not say they have to be permanent, nor did I say they have to cut taxes in general, just the ones on employment. Why is that such a bad idea?