Last week, two tightly connected, but separately reported, headline stories broke. Wednesday the Bowles-Simpson commission issued its report with proposals for shrinking the federal deficit, which include cutting federal spending and certain tax rates while raising payroll taxes. Friday morning, as the commissioners were voting on the report, the dismal November jobs report came out. It revealed unemployment is not falling, but sustained and rising from 9.6 to 9.8 percent -- the longest streak above 9% unemployment on record. The Commissioners gave it 11 out of their 18 votes, three votes shy of the mark that would have gotten Congress to take it up.
Job creation got an honorable mention but no real priority or substantive policy focus in the deficit commission's recommendations. The new unemployment numbers illustrate why this was a mistake, both politically and fiscally. It's true that we can't tolerate high deficits much longer. But neither can we tolerate sustained 10% unemployment and risk long-term, self-reinforcing, structural decline of our labor force and economy. It's time to tackle both issues -- the massive federal deficit, and massive unemployment -- together.
One central and oddly repressed fact in our discourse on controlling the deficit, is that the two goals are not mutually exclusive; they're deeply interdependent. Mounting a massive jobs stimulus effort won't increase the deficit -- on the contrary, we can't close the deficit without one. During the Clinton administration we went from a $290 billion deficit in 1992 to a $239 billion surplus in 2000 while creating over 20 million private sector jobs. That's no coincidence; job creation and deficit reduction are inextricably linked. Higher employment increases the tax base and business profits so revenues go up, while expenditures on unemployment and other government dependency costs go down. Debt service also shrinks as a result.
The cumulative budget effects are huge. The Congressional Budget Office for many years tracked the potential impact of job growth on projected deficits, though it has apparently ceased doing so. But in 1995 it projected that just a one percent increase in employment would cut the deficit by $415 billion over six years. In fact, that's roughly what happened. Now, imagine the impact on today's deficit (currently $1.29 trillion and rising fast) if we brought the unemployment rate down four percentage points to a pre-recession range of 5.5 - 6%.
That would argue that a massive jobs program, if it worked, would be worthwhile even if it cost hundreds of billions. But in fact, it need not cost anything. We can have a "free," budget-neutral jobs stimulus if we shift the current tax burden. We don't have to increase net taxes to close the deficit, or for that matter, decrease them to create jobs. We simply have to change the distribution of what is taxed. Right now, one of the chief things we tax to fund the federal budget is jobs.
Payroll taxation is currently vying with income tax as the top federal revenue raiser (this chart shows it accounted for 42% of federal revenue in 2009, while income tax accounted for 43%). It is the largest tax 80% of Americans pay, and the most regressive. It kills jobs by inflating hiring costs over 15% and effectively subsidizing non-labor production factors - energy, materials, land -- by an equivalent amount. That's a whopping, perverse 30+% price signal giving business an incentive to be materials/energy/land/technology intensive but to avoid using labor.
This is a colossal mistake and a deep-seated, long-standing, fundamental problem for the economy, artificially depressing employment for decades. As I argued in a previous post, unemployment is much, much higher than official rates suggest, because the official rates arbitrarily and progressively define millions of Americans out of the workforce to keep unemployment looking lower than it actually is. Chronically under- and unemployed women, people of color, seniors, youth, people with disabilities, legal immigrants and others are not counted as unemployed by the Bureau of Labor Statistics. BLS numbers indicate 15 million Americans are officially unemployed, but that's a small fraction of the number of Americans who would be working given the opportunity, but aren't. The country would have to create a total of 80 million full-time jobs to give everyone who would like to work that chance.
But this mistake is correctable with a strategy called payroll tax shifting. If we cut payroll taxes, and started taxing inefficient use of non-labor items by an equivalent amount (for example via a non-labor VAT tax, carbon pricing fees or energy inefficiency taxes and/or any combination of many such available alternatives that could raise the revenue that we now get from taxing payrolls), we would reverse the distortion in labor costs, disincentivize wasteful consumption of things, reincentivize hiring of people, and create tens of millions of jobs.
The Bowles-Simpson deficit report and the debate that will follow in its wake represent an important moment for coming to grips with our deep economic problems and considering this kind of fundamental tax reform. Indeed the report proposed fundamental reforms, slashing income and corporate tax rates along with spending. But it chose not only to keep payroll taxes, but actually to increase them through raising eligibility ceilings. That would only make our jobs dilemma worse, which ultimately will worsen the deficit.
One of the report's bright spots was a new recommendation that Congress consider a proposal from the previous Domenici-Rivlin deficit task force report, "Restoring America's Future," for a one-year payroll tax holiday to stimulute job growth. That's another indicator of growing support for the idea of cutting payroll taxes to generate jobs, but it's a short-term, token gesture compared to the fundamental game-changer we need. A one-year uptick in the perennial business cycle won't fix our problems; we need structural reform.
As Alton E. Drew recently wrote in a blog about the Bowles-Simpson proposals' effect on African American unemployment:
"While the co-chairs' draft speaks to increasing some taxes and cutting unnecessary entitlement programs, it barely speaks if at all to the apparent structural unemployment gripping the nation."
As the Domenici-Rivlin report itself states:
"Some politicians and economists present a false choice: reduce unemployment or stabilize the debt. Restoring America's Future, however, requires that we do both -- and begin now."
If we're serious about stabilizing our debt, speaking to the structural unemployment gripping the nation and improving long-term growth, we'll use this important political juncture to spotlight payroll tax shifting as a thoroughgoing solution to our fundamental problems. The politics of fundamental reform are always difficult, but the politics of half-measures will prove impossible.
Sen. Fritz Hollings: The Vat Is Necessary
The most effective jobs program will focus on incentives. They allow the new employee to generate his or her own income and provide taxes to repay the incentives.
For a Human Investment Tax Credit Program aimed at 6 million new jobs and encourage up to 4 million new entrepreneurs see the Aesop Institute website.
http://www.aesopinstitute.org
A few of the suggested incentives were tested in 1977 and created 2 million jobs - 20% of all jobs generated the following year.
Suggested tax incentives can readily be refined and voted into law. That should be an urgent order of business.
The new 11 year sunspot cycle has begun. NASA estimates that any one of four anticipated “extreme” solar storms could cause New York, Washington, D.C., Chicago, Atlanta, Seattle and most of the Eastern U.S., as well as many other metropolitan areas, to lose grid electricity, possibly for weeks.
On-site renewable energy is an insurance policy - as well as a practical way for disruptive technologies and creative entrepreneurs to create very large numbers of jobs.
In the U.S., NASA estimates a strong geomagnetic storm could cause 130 million people to suffer a long-term shortage of electricity. The cost is estimated to be $1-2 trillion the first year. Roughly the combined price tag of the wars in Iraq and Afghanistan!
See Electric Surprises on the Aesop Institute website.
I still think it's a good idea though--cutting payroll taxes will make labor much cheaper and the alternative tax, whatever it may be, would at the very least provide incentive to businesses to become more efficient and more environmentally friendly.
The surplus is urban myth. The money was never collected. It never existed.
This is the Congressional Budget Office's analysis of revenues vs outlays for the years 1970-02009. If you check 1998 - 2001, actuals for Clinton's second term, you will see that not only was there a SURPLUS (indicated as a positive rather than a negative number in the "Total" column) but that the national debt declined in each of those years. You probably don't want to look at what happened in subsequent years, but if you do, remember that 2009 was a Bush budget.
To work with your hands here is lowly work. Our kids want to go to college and have fun in fraternities and become lawyers and sue each other and become Wall Street types and play shell games with each other in money and capital markets. Real constructive!
You do seem to agree that what I suggest is a worthy endeavor but more of what I have suggested needs to be done.
Pardon my ignorance.
2. For the moment, the market does not seem to be doing a very good job at identifying and initiating the manufacture of things in which we have a comparative advantage .
3. Why not get in on the ground floor of industry that is just jgetting started elsewhere? and gain competitive advantage?
exmate, MD, MBA
when he got rid of glass seagull. Against Arthur Leavitts wishes. He knew he was allowing for the
the wrong thing. Check c-span archives.
(1) taxes on labor
(2) other mandatory costs to labor (healthcare, OSHA, other regulatory obstacles)
(3) Volatile economic/political environment (elevates risk of more harmful legislation or regulation)
(4) 'stickiness' of wages - basically, the bubble is popping and our general standard of living IS decreasing, but people don't want to believe this and are holding out for a job within the same 'acceptable' range of income as before.... not gonna happen and the sooner folks wrap their mind around the fact that a college degree does not guarantee any sort of job, that being skilled in one area does not guarantee a job there, the best way to protect one's ability to generate income is to diversify your skill set so as to be able to adapt more readily to changing labor demands of the market.
Addressing the idea of why the manual arts/crafts have disappeared from so many high school curricula is directly related to the cost of staying current or ahead of the development of the technology and of people who are capable of teaching and coaching the development of skill. At one time industry would couple with the schools to provide the current equipment. It may be too expensive for even them to come up with the investment. It also speaks to the difficulty of being able to raise the real estate taxes that would be needed to support the site. Yes, we do need to find another way in which to support our schools. Specialized training for teachers, infrastructure, and time in which to teach and practice are all essential to a successful program of this kind.
Your bias against 'rugged individualism' is misplaced, I believe. We are individuals first, then we choose to be part of 'society' - and society cooperation must be beneficial to the individual, which is why free and unhindered trade between people is the greatest bonding and cooperative factor for humans to engage in. Its not a matter of 'caring' about others, it is a matter of 'doing' for others... talk is cheap, action speaks volumes.
Other contributing factors to job stagnation include things like the taxes on labor, health care, regulations, minimum wages, as well as the ongoing trends of automation and outsourcing.
Some of those factors, like the payroll taxes, we could certainly do without; however, I do not believe that removing regulations is a good idea, and although excessive automation/outsourcing can be discouraged, it probably can't be reversed that much. The best way to ensure sustainable long-term growth in our economy and thus more jobs is by supporting small business, investing in a highly skilled work force, eliminating regressive government policies, and keeping in place proper regulations. I would like to see a LOT more government investment in our working force and in our infrastructure.
Its so interesting to see folks try to manipulate economic laws to suit their political viewpoints. Dems say 2+2 = 3, and repubs say 2+2 = 5.... neither seem to be happy with the reality that it will always be 4.
The problem with all these different attempts at manipulating the tax code is that the goal is always to 'get something for nothing' - same thought process as the control of the money supply. Taxes are always and forever be an overall negative consequence on the economy - the different taxation methods just shift this negativity around, allowing for various political factions to appeal to their base and to garner power through 'special interests'.
Sorry, but we cannot avoid the price of the governments mismanagement and influence over the past 30 years (actually since 1913 and before), it is during this time that our economy 'grew' by borrowing money (or inflation) which is not 'real' growth. The piper must be paid. And those that will suffer most will always be the middle class and the poor. Most folks think that government is necessary to protect the poor from the rich and give it so much power, but the the rich and politically connected are able to use that governmental power in their interests better.
The last new entitlement program, the prescription drug for seniors gift to the drug companies, was started by W Bush, who didn't pay for it. Like he didn't pay for 2 wars!
Health care reform was written by the health insurance companies, and will actually cut the deficit over 10 years.
Also, The prescription drug program was uncalled for. Medicare is already in the red. The two wars haven't done us any good.
Start with these and then you can earn the right to imply that anyone is engaged in "reckless spending".
Like the corollary goes: if you want to kill something, tax it. If you want something to flourish, reduce or eliminate taxes.
It's a direct answer to a direct problem - do you think it has a chance of getting any traction?
So many of the jobs here in Los Angeles for the new college grads barely pay minimum wage - unless its a "prestigeous" intership, which means they are still on mom and dad's payroll. If nobody makes a decent wage, NOBODY PAYS TAXES. This is unsustainable for the workers, the businesses and the government.
— Milton Friedman