Economic Stimulus and Eye on the Pie and Opinion and Economy

MARCUS: Tax cuts are not efficient as a job stimulus

December 25, 2010

Many of the best minds in the nation are endorsing the latest stimulus package, which retains the Bush tax cuts and reduces workers’ Social Security contributions nearly one-third.

What do we want from a stimulus at this stage of the business cycle? I thought we wanted to increase employment. This package gives people who are on a payroll no change in their federal withholding for income-tax purposes. That’s right—no change in your pay. Instead of seeing your taxes rise, they will stay the same as they have been. Similarly, extending unemployment benefits does not increase consumer demand above current levels.

Take-home pay, however, does go up slightly. The Social Security portion deducted from your pay by your employer will decline. That puts more cash in your pocket. How much?

If you make $10 per hour and work 2,000 hours per year, you’ll see $400 spread over 12 months. No matter how spread out, $400 is not chopped liver to the recipient. However, consider how paychecks are spent. An added $10 per week will be spread over many goods and services. The chances are that some money will go for groceries, some to pay off bills, some for beer, some for church and some for the lottery.

That will happen in large numbers, but will the producers of these goods and services hire more workers?

The answer, according to the best economic tradition, is, “it depends.”

If the companies have huge inventories of these goodies, they don’t need to hire workers to produce more. If the companies don’t have huge inventories, they might have to produce more. That does not mean, however, they will hire more workers, not if the companies have excess capacity in their factories.

If companies are at the point where they must expand capacity, will they hire more workers? Not under this tax bill. As I understand the bill, which is longer than any of the Classic Comics, there is an incentive (temporary accelerated depreciation) for businesses to invest in new equipment. It has been new, more productive equipment that has reduced the demand for labor and given rise to great leisure for the past 200 years.

At this time, how eager are employers to hire workers? Every worker must be regarded in terms of the cost he or she adds to the firm versus the value of the added revenue from the production by that worker. Businesses are wary about what will happen to health insurance costs and they don’t want to hire workers if the economy does not sustain its growth. With good cash balances, many firms would rather buy a new, trouble-free machine than hire workers who complain about the parking and the canteen.

If the government wants to increase private-sector employment, it should reduce the costs to business of employing workers. Alternatively, if the private sector doesn’t hire the unemployed, then hiring directly or indirectly by government becomes necessary. How? One example: Workers with high school diplomas could be taken off unemployment compensation and placed in better-paying jobs as tutors in our schools. 

Tax cuts are a roundabout way to get more people employed. Seems simple: If you want people working, you find ways to make sure they are hired. This tax-cut program just “holds tight” and does little as a stimulus. But it satisfies the cynical adage: If people seem to need help, you should seem to give them help.•

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Marcus taught economics for more than 30 years at Indiana University and is the former director of IU’s Business Research Center. His column appears weekly. He can be reached at mmarcus@ibj.com.

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