CNN: The Obama disco-jobs bill

Ready for leisure suits, gold chains, Angel’s Flight skin-tight polyester pants, and the Village People?  If you liked the economic policies of the Carter presidency, you’ll love Barack Obama’s new jobs bill, CNN reported yesterday:

The ghost of Jimmy Carter’s one-term presidency is hovering over President Obama as the Democrats try to pass a jobs bill in time for this year’s elections. So why is the centerpiece of the measure — a tax break for companies that make new hires — a play straight from Carter’s economic policy circa 1977? …

Critics of Carter’s plan — and Congress’ now — say that the problem with any jobs credit is the potential for waste. It’s estimated that of the companies that claimed the tax credit under Carter’s plan, two-thirds would have hired those employees regardless of the tax break.

“It’s a windfall for companies that want to expand anyway,” says Rea Hederman, a senior policy analyst at the Heritage Foundation. Should the bill pass, Hederman says the big beneficiaries of the tax credit this time around would be companies in the big-growth areas of health care and education.

Another problem with the 1977-78 effort is that many companies, especially small businesses, didn’t even know about the tax credit. A survey by the National Federation of Independent Business found that only 43% of their members knew of the law in January 1978.

Meanwhile bigger companies were, and still are, better-equipped to take advantage of the tax breaks because their armies of accountants can keep up with the complex changes. (Never mind that the law behind the 1970s tax credit was called the Tax Reduction and Simplification Act.)

Supporters of Carter’s bill point out that the unemployment rate dropped two points over the following two years from a peak of 7.8% when Carter took office.  However, as CNN notes, the economy in 1976 and 1977 had begun a rather robust recovery.  Real GDP increased 5% each year, a level which would have created jobs regardless of the tax policy.  Since that growth started well before Carter took office, it’s more reasonably attributable to the normal economic cycle than to Carter’s policies.  In fact, the Whip Inflation Now buttons have a better case for claiming credit, and that’s not saying much.

This bill has the same structural problems as Carter’s, which is that it targets a business decision on which it will have little influence.  No business will hire someone and pay them $106,000 to get $6000 back in only one year without additional demand to support the $106,000 salary.  Barack Obama’s suggestion that small businesses will take out loans to expand employment is ludicrous on its face.  No business looking at a flat economy will expand its labor force without being sure that sales will support the added costs — which, by the way, go beyond the actual salary when counting benefits and expenses.

The effect of a tax benefit will be to further subsidize the already successful and to put struggling businesses at a greater disadvantage.  If two entities in a market already have a competitive mismatch, the hiring tax credit will aggravate it by allowing the better business to slightly reduce costs while bringing more forces and product to market.  That will allow them to lower prices (or not hike them) more readily than their competitors, which would create a government-induced bias that could drown the disadvantaged entity.

CNN concludes that this package “isn’t big enough” to actually create a broad-based hiring binge, but what they mean is that it’s not comprehensive enough to do it.  In order to get capital off the sidelines and investing in business growth, the administration has to reverse its price signaling over the past year on health-care and energy costs, as well as tax policy on capital gains.  Reversing the big-government, high-spending agenda would do wonders for the markets and encourage a stampede back into venture capitalism, the engine of small-business growth and economic expansion.  The current jobs-bill proposals are just another version of The Hustle.

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