Obama’s “jobs bill” has a slight defect

posted at 8:11 pm on February 10, 2010 by Ed Morrissey

Barack Obama has begun his “hard pivot” on jobs and the economy by pushing hard for approval of a new stimulus package.  Of course, Democrats can’t actually call it a stimulus package, thanks to the failure of their $787 billion Porkulus bill from a year ago that saw over 3 million jobs lost in the time since its passage. They may not be able to call it a jobs bill, either, as the Associated Press explains:

It’s a bipartisan jobs bill that would hand President Barack Obama a badly needed political victory and placate Republicans with tax cuts at the same time. But it has a problem: It won’t create many jobs.

Even the Obama administration acknowledges the legislation’s centerpiece — a tax cut for businesses that hire unemployed workers — would work only on the margins.

As for the bill’s effectiveness, tax experts and business leaders said companies are unlikely to hire workers just to receive a tax break. Before businesses start hiring, they need increased demand for their products, more work for their employees and more revenue to pay those workers.

In other words, if you’ve taken Econ 101, you know the problem with this bill.  Businesses hire people to meet demand, and they don’t hire people until that demand creates opportunity for profit beyond the price of the employee.   Otherwise, the business loses money and eventually fails, or more likely, reduces its work force to meet the actual demand for its products or services in order to survive.

But the Obama plan accounts for that, right?  It must set the incentive level so high that the business will profit by hiring, or so one might think.  Unfortunately, no:

The bipartisan Senate plan would exempt businesses from paying a 6.2 percent Social Security tax on the wages of new employees, as long as the workers have been unemployed at least 60 days. The tax break would run through the end of the year.

A company could save a maximum of $6,621 if it hired an unemployed worker after the bill is enacted and paid that worker at least $106,800 — the maximum amount of wages subject to Social Security taxes — by the end of the year. The company could get an additional $1,000 on its 2011 tax return if it kept the new worker for at least a full year.

The nonpartisan Congressional Budget Office recently concluded that reducing Social Security taxes for companies that add workers would be among the most efficient ways for the government to create jobs. However, in showing how difficult it is to create jobs through tax policy, CBO estimates that such a tax break would generate only eight to 18 full-time jobs per $1 million in tax breaks.

Let’s consider the incentives built into this plan.  It forces businesses to hire people who got laid off earlier in the process, which in general would indicate that they may have been more dispensable to their previous employer.  In order to take advantage of the tax break, the business would have to keep them employed all year long, regardless of their performance.  For a full-time worker at minimum wage of $7.25 an hour would cost a business $15,080 in salary alone, plus roughly another 25% for overhead such as taxes, benefits, and ancillary costs, bringing the total bill for one employee to $18,850 for the year.

What does the business get in return?  A maximum of $6,621, and only if that worker earned over $100K for the year.  In other words, the return on the investment would be about 6% in the first year, and around 1% in the second year, at best.  Unless the business needed the employee to meet demand, no sane business owner would make that hire — and if the demand required extra staffing, the business owner would add the position with or without the tax break.

To put it directly, this subsidizes nothing more than the normal business decisions made by growing companies.  It won’t incentivize anyone in their right mind to start a hiring spree.  That’s why the CBO scores it as low as they do.  And at that scoring, the best the proposal will do is increase jobs by 180,000 over the course of the year — which is less than we’ve lost in most of the months in 2009.

But Obama really wants a way to save jobs — those of his Democratic allies in Congress.  It’s almost literally rearranging the deck chairs on the Titanic of Obama’s top-down economic policies, which are sinking quickly in public opinion.

Update: Be sure to read Slublog’s take in the Green Room.


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Comment pages: 1 2

It’s not so much that he hasn’t met a payroll. Other presidents hadn’t either. It’s his incuriosity, his uninterest, and even his secret contempt. It’s his vision of business as a kind of indentured servant to the state, nothing more. He doesn’t see business as an equal player in the American life, not as a vital and integral part of a social structure, doesn’t see or embrace the notion of business as an expression of people’s dreams and hopes for personal fulfillment, and thereby serving a regenerative social end, contributing to communities, sustaining charities, etc. Business is a necessary evil to Obama. So he can’t think of helping it beyond the crude stimulus-response model applied to a laboratory animal. Thus he offers his “tax rebates”, a crude and condescending and ultimately useless gesture. He would never offer something like capital gains tax cut, for that would mean acknowledging the status and significance of business, and that would threaten his sense of statist supremacy.

rrpjr on February 10, 2010 at 10:27 PM

neither party ever comes through on giving the payroll tax holiday on the employEE side, that would create demand and thus production and hiring…

give a payroll tax holiday for BOTH employer AND employee for 6 months and put off the expiration of the Bush tax cuts, sign the trade deals with Colombia S Korea etc and kill the health care and cap and trade bills

we will be chugging along at a nice clip in 6 months….

ginaswo on February 10, 2010 at 10:30 PM

Exactly. Why is it that no one in the Democrat party has ever taken Econ 101????

Christian Conservative on February 10, 2010 at 10:01 PM

Since they obviously have not and they need a lot of time to raise funds to protect their jobs, I recommend they read Economics in One Lesson. In a mere 8 pages this book lays out basic economics. The rest of the book is application\examples of the lesson.

WashJeff on February 10, 2010 at 10:31 PM

What is the hard part of understanding getting out of a recession requires those things to help expand the economy by leaving money in people’s wallets? ajacksonian on February 10, 2010 at 9:25 PM

Exac-ta-moondo! Until the consumer starts spending there will be no reason for companies to expand their work forces or increase their inventories—it’s called demand. Most all of Obama’s and the democrats policies have done nothing to stimulate spending. In fact, most of their policies have left businesses wondering where their next CUT will be made, because of unknown tax increases—cap and trade, health care cost, and the expiration of the Bush tax cuts on all those weathy Americans—any business grossing over 200k per year. For more than a year, Pelosi, Reid, and Obama have been systematically destroying the engine that drives the economy with their social agenda designed primarily to force more dependence on the government, while maintaining/justifying their own jobs. It’s a vicious cycle destined for failure.

Rovin on February 10, 2010 at 10:49 PM

Free markets? Hopey don’t play that.

trapeze on February 10, 2010 at 11:20 PM

Hmmmm.

And with 36+ states increasing the payment rate & amount for unemployment this means that any employer who hires someone based on this bill is a complete and absolute … moron.

Ok. Idiot. No go?

Assclown. That’ll do I guess.

memomachine on February 10, 2010 at 11:53 PM

Are these guys really this dumb? They surely had someone do the math before they proposed it didn’t they? Cause this is just stupid! STUPID!

Now I remember why I always end up voting Republican. Republicans at least have brain cells that work.

petunia on February 11, 2010 at 12:24 AM

You don’t need an employee making $106,000 a year but if you hire them you will get back $6,000. Is that really the proposal?

Hey then they can use that $6,000 to hire a lawyer for their bankruptcy filing.

petunia on February 11, 2010 at 12:29 AM

One the other side of the coin… If a prospective employee knows about the tax incentive, won’t he negotiate higher pay to begin with?

Dasher on February 11, 2010 at 1:07 AM

Find Glenn Beck’s 2/10/2010 show on youtube. He spend the first 35 minutes talking about how the economy jump started with huge slashes in government spending back in 1920. He brings it down to a very understandable and digestable presentation of a lot of geeky economics concepts. Everyone here at Hot Air needs to be watching this show just for the sheer history and economics lessons. He is filling the holes that were deliberately left out of our public school educations.

karenhasfreedom on February 11, 2010 at 2:42 AM

Imagine everyone’s taxes were cut in 1/2 tomorrow. You think that might jump start the economy just a wee bit? Cut in 1/2 with no strings attached. Every tax rate gets cut in 1/2. Payroll tax gets cut in 1/2 for both employers and employees.

Unemployment would be 6% by the end of the year.

But then Obama would have no direct power on how people spend their “tax cut” and so it is not even worth considering.

angryed on February 11, 2010 at 6:04 AM

Unexpectedly.

erakis on February 11, 2010 at 6:47 AM

If you were a small business, would you buy into this b.s., or would you stick it out until this November?

olesparkie on February 11, 2010 at 8:28 AM

Isn’t cashing an unemployment check considered a “JOB”
under this administration?

elderberry on February 11, 2010 at 9:02 AM

Um… errr… taking money AWAY from Social Security?!? Haven’t I heard something about SS being somewhat imperfect and mildly under-funded already?

CLaFarge on February 11, 2010 at 10:25 AM

The catch in the jobs bill: to qualify for the basic credit, employers need to retain the employee for a minimum of 60 days

In my state, it takes 90 days of employment with one employer to qualify for unemployment

I guess that is supposed to be an incentive for employers to use the normal 90 day turnover (employees who did not work out and are dumped before they can claim wrongful firing) to take a credit on these losers

This might pump Obama’s job numbers a bit

Some of the most ruthless employers in retail maintain a steady stream of short termers in the current job market. Work them to death and dump them when they tire for fresh labor before the magic 90

entagor on February 11, 2010 at 12:40 PM

OK, let’s use the average private sector wage: $47,000/year. The employer gets a pass on its 6.2% social security tax: $2,914. A one time savings.

(I presume the employee still has to pay the tax.)

Here’s a question to put that in perspective:
Since the recession began in Sept, 08, how many state, federal and local government workers have gotten raises of $2,900 or more?!

jeanneb on February 11, 2010 at 4:09 PM

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