Bruce Bartlett has a nice piece in the New York Times this week on the (non-)relationship between the tax wedge and employment rates across countries. The wedge is the gap between what employers pay and what employees receive after taxes come out. Reduce the wedge, the theory goes, and since you're making employees cheaper to employers, they'll hire more of them.
Most economists believe there's something to this. After all, demand curves slope down, and all else equal, lowering cost should increase quantity. But the problem is demand curves move around a lot, and at a time like this, for example, the key determinant of hiring is going to be more demand. Even at reduce rates, employers won't "buy" more workers if they don't need them.
That doesn't mean measures like the payroll tax holiday are useless. For one, by increasing the after-tax wage, they put more money in people's pockets, and that in-and-of-itself creates more demand. Also, when the economy turns up and demand begins to come back, a cut in the tax wedge can give cautious employers a nudge to pull some future hires forward into the present.
But as Bartlett shows, there's no correlation between the tax wedge and employment rates across countries. The figure shows the scatterplot. There's a slope there but it's nowhere close to significant and the R-square is 0.005, meaning there's no cross-country correlation between the magnitude of the tax wedge and the employment rate. A better test would be changes across time, and such panel data analyses find a bit more than the cross-sectional view. But not much. Here again, small responders win.
The three policy ideas I hear most often for greater job creation are cut taxes, cut regulation, and more education. While I support the latter, especially for those whose access is blocked by income constraints, none of these ideas will do much to increase the quantity of jobs.
What will? Greater consumer demand, an end to deleveraging, a growing housing market, more domestic production of the goods we consume, new innovations that generate hungry, job-creating start-ups financed by now-idle capital, clean energy investment, and if all else fails, a national program to rebuild and repair the nation's infrastructure, from roads to schools.
Boom...there's your jobs program. And I can think of policies that go along with each one of the above--in order: consumer demand: stimulus; housing: loan mods and principal reduction for some, time for others; more domestic production: weaker dollar, smaller trade deficits, manufacturing policies; innovation/start-ups: R&D, public/pvt/academic partnerships; infrastructure: FAST!
I'm being a little bit glib here...each one of those ideas deserves a lot more ink. All's I'm saying is that here is where the hard work is in terms of job creation--not in the passivity of failed supply-side, trickle-down, deregulatory BS (and I don't mean Bowles-Simpson).
Bartlett gets the last word:
The reason that unemployment is high clearly has nothing to do with taxes. Consequently, there is no reason to think that reducing taxes further will do anything to raise employment by reducing the tax wedge.
This post originally appeared at Jared Bernstein's On The Economy blog.
Follow Jared Bernstein on Twitter: www.twitter.com/@econjared
It's shocking that this simple fact is ignored on the right. It's also shocking that the voices of small business owners like us are ignored in the debate.
Actually, lets not. It would be pretty dumb to pretend all the rich are right wing ideologues. It's even stranger that you say that before actually mentioning Buffet, a rich man who says they should pay more taxes.
It's not the view of the rich that taxes should be lower and that this will help the economy. It's the view of CONSERVATIVES, rich and poor, and it's wrong.
You were trying to suggest that everyone wants to keep what they have (putting it in a nutshell), that everyone thinks the same as you (false), and that therefore conservativism is right (wrong).
Now you want to avoid my critique by simply saying conservatives are different, like snowflakes. I'm saying you were narrowminded, wrong, and dreq a typically irrational conservative conclusion.
"there are too many variants such as liberal conservatism or more recent compassionate conservatism championed by Bush."
Bush started two wars. Just putting "compassionate" in your ad doesn't make you compassionate. Who cares if there are different labels - you haven' said anything about why they're different or how that's relevant (hint: it's not).
"Yes, I feel I do have the American Dream,"
Again, you completely missed the point.
Keeping what you have is NOT the American dream. Therefore, your description of what you think everyone wants is un-american. The Dream is about a BETTER life for your kids, not keeping what you have.
Human beings are selfish. We're also NATURALLY SOCIAL animals that have needed to co-operate in units larger than the family unit for tens of thousands of years for hunting and protection and agriculture. We made a 300 million person group called America that is the greatest the world has ever seen.
Our co-operation defines us, NOT our selfishness. You are flat wrong in your beliefs, and more wrong projecting them on everyone else.
Concern over aggregate demand, something that all businessmen will blame for their own mistake in producing too much of a commodity or good that other people do not want, is incorrect and focusing on it is treating the symptom not the disease, namely mal-investment brought on by a credit bubble that pushed demand of some commodities above their natural demand levels. Lower taxes are a better way to treat the disease of excess credit and mal-investment, rather than amplifying the problem with more cheap credit as the Fed, et al, are doing. It allows capital to flow to its most beneficial use with less friction creating real autonomous private sector growh and sustainable jobs. Keynesianism creates artificial economic activity and no company hires for long-term positions based on short-term stimulus.
Say and Mill are still relevant on this issue today.
Kai
You are absolutely rights, as is reininop, that the reason people produce is to consume. The want to consume is always there but the means not always so. That is why the government should be making it easier for people to produce. By making it easier for them to produce value, you also make it easier for them to consume.
Check out chapter XV (page 59)
http://socserv.mcmaster.ca/econ/ugcm/3ll3/say/treatise.pdf
Government spending does not create value all it does is move the time preference of consumption forward, through borrowing, or it takes from one productive source (a viable and profitable business) and shift it to a less productive use (a bridge to nowhere that creates less value than it did in the hands of business operators.
Kai
Maybe I will go take my uncle's farm over and start growing a few million pounds of turnips. Certainly if I grow more turnips, people will buy them.
Or lets just look at my own industry - aluminum. Massive production of primary aluminum in the past few years has driven the price down to the point where it isn't economically feasible to make it any more as the energy costs make it more expensive to make than you can sell it for at a lot of old smelters. Producing more isn't going to drive demand for it. The only thing propping up the price is LME warehouses stockpiling it and trickling supply out the door.
The economy lives on consumption as that is the end goal. Products are made to be consumed. The desire, or lack of, exists whether the product is produced or not. Production is a necessary activity so that things can be consumed.
Or another way to look at it, you can over produce, but can you over consume? If resources allowed for infinite consumption, then the answer would be no. Thus consumption should always drive production.
Yeah, your positive act of wanting to create books would create economic activity…especially if you are paying for the publication of those books by yourself…you would have to go out and work for that money and you will employ it in the publication of those books, not to mention the computers, printing machines, paper etc that would need to be created in your epic quest to write the best book on phone cord disentangling.
Chances are that your books may not sell well but the act of production will create value. Same with turnips. The hope would be that sooner or later you will decide to employ your labor and capital more effectively as you create value.
Your point on aluminum is well noted. It isn’t that people are not consuming, it is that they are not consuming aluminum. That is great. The market is sending a signal that too much aluminum is being produced and capital and labor needs to be employed elsewhere. This is great news and lets hope that American aluminum factories close and that capital is employed elsewhere in the production of something else that has more value.
Kai
The economic proposals of Obama aren't from some radicalist Liberal-Socialist agenda as the Right claim. In fact, they are a near mirror-image of Ronald Reagan's tax and spend policy of the 80's. The only difference being that he would have taxes LOWER then they were under Reagan and have military spending HIGHER.....What a SOCIALIST!
Most economists believe there's something to this. After all, demand curves slope down, and all else equal, lowering cost should increase quantity. But the problem is demand curves move around a lot, and at a time like this, for example, the key determinant of hiring is going to be more demand. Even at reduce rates, employers won't "buy" more workers if they don't need them.
Since the "Depression" or if you want to call it a "Recession" Companies had to cut back. And the first thing they cutback on was it's employees, and got rid of jobs and took their existing work force who already knew the jobs that they had just gotten rid of, and the employees whom were hired just for those jobs, that load was put back on too the existing employees with no pay increase...
Companies have learned they can get the same amount of production from what they have now, to what they had then. Why would they hire. if the same amount of work is getting done with less employees and they don't have to give them an increase in pay.,,l-)) .
That model has been turned upside down. Property taxes have been capped and landowners are making a killing. Income tax codes are riddled with loopholes. The rates on income taxes, estate taxes and capital gains taxes have all been slashed.
To make up for these lost revenues, politicians have had to turn more and more to those tax payers with the fewest lobbyists. Payroll taxes, sales taxes and fees for State Parks or state colleges have all skyrocketed. The little guy and main street are getting killed. Wall St and Easy St are drowning in cash.
Until balance can be returned to the force, there should be no new taxes on the poor and middle class.
http://abcnews.go.com/US/bringing_america_back/american-infrastructure-jobs-shipped-china/story?id=14592567
Still think it's a "Big Freaking whup"?
http://www.frbsf.org/publications/economics/letter/2011/el2011-25.html
So, even if some of the demand IS for "Chinese goods", SO WHAT???? It would STILL make more sense to than NOT doing ti!
And that was the whole point of my tepid recovery: the problem is consumer demand, plain and simple. It really couldn't be more clear....and I"m still not sure why you're arguing about it....
No one would suggest that investing in clean energy is a great thought... more solyndras and similar failed attempts at this agenda-driven model need to be significantly challenged.
More education is a pre-requisite for any economy and country... but we have spent record amounts on education and failed because we invest it in a system itself which is failed. Obama himself has admitted that government intervention in higher education has created a less efficient model. Education matters if it meets job requirements... make this country attractive to business (reduce regulation, reduce taxation) will create the demand for jobs for which education may then focus on delivering the needed skills.
There are no barriers to education today... only the determination by persons to get the education. Working their way through community college (2yrs) and transitioning to 4yr institution is feasible for anyone... as long as we attack the cost structure of higher education (and secondary).
The real problem is the tax code is 27,000 pages long if printed out single spaced single sided standard font and size. There is no way this can be effective.