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.