Round Two

(Also known as: A Stimulus for Tomorrow, Part 10)

by von

Everyone should have seen this coming .... well, everyone who reads these here Wings of Obsidian.  From Salon (citing Bloomberg and The New York Times):

Call it the the stimulus that dare not be named. Bloomberg reports that the Obama administration is considering "a mix of spending programs and tax cuts to respond to widening job losses that would amount to an additional economic stimulus without carrying that label."

On the table: A boost in transportation spending, extension of unemployment benefits, and a continuation of the first time homebuyer tax credit. The New York Times adds in a possible $3000 tax credit to businesses for new hires, and a proposal to "allow more businesses to deduct their net operating losses going back five years instead of the usual two."

    Some folks will claim that a second stimulus is needed because the recession has been much worse than anyone had predicted.  We have a technical term for this view:  bullshit.  It is absolutely true that the Obama Administration misjudged the depth of the current recession, and Geoff at Innocent Bystanders has the (updated) chart to prove it.  But a lot of folks outside the Administration were warning that the Democrats' stimulus plan didn't treat the recession seriously; instead, it was full of crappy half-measures, programs of dubious benefit (ahem, cash for clunkers), and payoffs to various Democratic interests.  And, then, moderate Senate Republicans somehow, against almost all odds, made the Democratic plan worse.  Under these circumstances, a bunch of folks thought that a son of stimulus was practically guarateed.  To choose a random example: me, circa February, 2009:

The current stimulus package is too small on the front end and too bloated and unfocused on the back end.  It wasn't a stimulus bill so much as a grab bag of goodies.  Of course we can't rule out another stimulus package, because we didn't do a proper stimulus package the first time. 

   President Obama's second take at a stimulus package also doesn't fill me with the warm fuzzies.  The trial balloon for stimulus number 2 consists of more complicated tweaks to the tax system and more transportation spending.  This new plan is still too unfocused.  For instance -- in the same vein as "cash for clunkers" -- giving limited tax credits for new hires could very well have counterproductive effects (why hire now if the government might pass a tax credit tomorrow?  do tax credits encourage employers to dump older, high-wage workers for new hires?)  These types of tweaks also impose high compliance costs.  And how many new roads does a "green" economy need, anyhow?  (Or is this going to be a version of Rep. Mica's high-speed rail plan?)

Let's get serious.  The best way to create new jobs (and keep the jobs that exist) is a payroll tax cut.  It's a proposal that has been on the table from the beginning.  If you cut the payroll tax on both the employer and employee sides, you provide employers with an incentive to both keep and hire workers (because the tax consequences of hiring and retaining workers are smaller) and you provide workers with more money to spend or save (either of which is helpful behavior in light of the dual consumption/credit crunch).

Yes, even a temporary payroll tax cut is costly.  But what new program offered by the Obama Administration hasn't been costly?  Let's get it right this time. 

Prior installments:  A Stimulus for Tomorrow, Parts 1, 2, Hilzoy's response, 3, 4, 5, 6, 7, 8, and 9.

Comments

[tequila]

You mean let's do stupid conservative tax tricks and dress it up as stimulus?

There's better ways to do this.

http://www.cbpp.org/cms/index.cfm?fa=view&id=2264

[cleek]

shorter everything a "conservative" has to say about economics: yeah, i think a tax cut would work here!

[(TO) Francis]

Let's get serious? OK, let's:

(a) adopt a French-style health care payment system;
(b) massively reduce military spending;
(c) eliminate ag. subsidies;
(d) start regulating corporate ag. like the massive polluter it is;
(e) split investment banks from commercial banks, impose strict leverage limits on both, work with foreign governments on eliminating cross-border regulatory arbitrage, and use trust-busting laws to shrink the size of the largest institutions;
(f) impose a disproportionate salary tax on any corporate employee earning more than (pick a number) times the median corporate salary, and give both the employees and the small shareholders a significant voice in executive compensation decisions.

etc.

but let's not suddenly start underfunding social security. We all know where that's going. Do try not to insult your audience.

[von]

You mean let's do stupid conservative tax tricks and dress it up as stimulus?

Well, the stupid Democratic tricks aren't working, so .....

By the way, a payroll tax is not a conservative idea. Indeed, it was historically (i.e., in 2001 and 2003) a Democratic idea, and one version of a payroll tax cut was sponsered by a freshman democratic Representative in 2009.

[von]

but let's not suddenly start underfunding social security. We all know where that's going. Do try not to insult your audience.

You're mixing apples and oranges.

In the short term, Social Security is overfunded -- not underfunded. Social Security is in surplus; it can absorb the impact of a payroll tax cut/holiday.

In the long term, Social Security is underfunded whether or not you adopt a payroll tax cut/holiday. That's why I support means-testing as a long-term solution to keep Social Security solvent.

[mckinneytexas]

Thanks, Von, for putting some ideas out there that make sense. You will be hammered for your efforts, but that is hardly news.

"Targeted", i.e. limited, tax cuts do nothing more than create a temporary and artificial market for the limited class of taxpayer than can benefit from the cut. I would not decide to add an employee if the bottom line was paying 3K less in taxes, nor would any small business.

However, if my matching and individual requirements were trimmed by 20%, I would spend or save an additional $10,000 and my employees would have an additional $8,000 to spend or save. If the cut were just for my employees, that would be fine too on a personal level since, knock heavily on wood, the recession hasn't hit my firm nor does it appear likely that it will other than clients are taking longer than usual to pay their bills. However, I would think that most businesses struggling with the recession could use a reduced drag on revenues and cash flow.

Whether a payroll tax is conservative or liberal is beside the point--the question is: what is the quickest, most administratively efficient means of getting money into the hands of consumers and business? Taking money in the form of tax receipts, enacting spending legislation and then doling out the money 12-18 months later is maximally inefficient.

Nice post, Von.

[DavidG]

Can I get some state aid up in here?

[(Chris) McManus]

shorter everything a "conservative" has to say about economics: yeah, i think a tax cut would work here!

Cleek, that's funny, but a little unfair in this case. Normally conservatives want to cut the top marginal rate, slash the capital gains tax, or abolish inheritance taxes. In other words, conservative tax cuts are about helping rich people. The payroll tax, however, is a regressive tax that disproportionately impacts poor people. It charges a flat rate only on earned income (not capital gains or interest) up to a fixed cap. The result is that someone making over $250,000 a year pays an effective rate less than half of anyone making less than $100,000. So cutting payroll taxes is one of the few tax cuts progressives can support.

[tequila]

Stimulus spending should be aimed at generating economic activity, not simply allowing firms to save money. I'll just quote from the CBPP:

"The most efficient way to boost consumer spending is to put money into the hands of people who will spend it quickly rather than save it; tax cuts focused on moderate- and low-income households are more effective as stimulus than tax cuts that are larger for people with higher incomes, because people at low-income levels spend a larger share of tax cuts they receive than people at higher income levels do.

A payroll tax holiday does not score well on this front — too little of the benefit goes to lower-income households struggling to make ends meet and too much goes to higher-income taxpayers, who are likely to save a significant fraction of any new resources they receive.

...

Suspending employees’ payroll taxes would immediately translate into higher take-home pay for workers. Suspending employers’ payroll taxes, by contrast, would put cash into companies’ coffers, where it is likely to sit as long as sales are weak and factories are operating below full capacity. Indeed, according to the Congressional Budget Office, suspending employer’s payroll taxes is “not a particularly cost-effective method of stimulating business spending: Increasing the after-tax income of businesses typically does not create an incentive for them to spend more on labor or to produce more, because production depends on the ability to sell output”.

BTW, your Dem payroll tax advocate was one of only 11 to vote against the stimulus. Sorry, that won't fly as a Dem idea.

[(Chris) McManus]

Taking money in the form of tax receipts, enacting spending legislation and then doling out the money 12-18 months later is maximally inefficient.

I'm not sure that's true. You're right that a payroll tax would kick in faster. But that has to be balanced against other considerations. When the government gives someone a tax cut (or any other form of cash), there's always the possibility that the person will save the money rather than spend it, in which case it's useless as stimulus. Even if most of the money is spent quickly, however, tax cuts still generate a lower multiplier than spending programs. When the government buys something it creates immediate economic activity in terms of producing the goods or services the government buys. When the producers then spend some of that money further demand is created. But when the government simply gives someone money (tax cuts) that does not directly cause any economic activity in terms of producing new goods and services. Instead, you're relying entirely on the recipient to spend the money. So you effectively skip the first step of the process, and get less bang for your buck.

Ultimately, the best thing is to spend quickly. But if you have to go with tax cuts, payroll cuts are the best.

[Carleton Wu]

In the short term, Social Security is overfunded -- not underfunded. Social Security is in surplus; it can absorb the impact of a payroll tax cut/holiday.
In the long term, Social Security is underfunded whether or not you adopt a payroll tax cut/holiday.

Smoke meth! In the short run you'll be pretty healthy, and in the long run you were going to die anyway, right?
Seriously, this is the worst thinking Ive seen recently by an adult. It's not bad now, so let's make it worse, since it's going to get worse anyway. Even more worse, who cares, it's not rich people right?

[von]

Tequila, the CPBB is one of the few think tanks that have come out hard against the Payroll tax. Its opposition is a lot of bunk.

First, the CPBB is analyzing a two month holiday in a payroll tax. That's not the proposal; the CPBB has constructed a straw man.

Second, the CPBB fishes for sources that agree with its (predetermined) view, rather than honestly assessing the evidence. For example, the CPBB favorably cites the CBO for the conclusion that a payroll tax is an inefficient way of stimulating business spending. (This conclusion is correct but irrelevant, by the way - see below.) But the CPBB ignores the CBO when it notes (also correctly) that "A payroll tax holiday that applied to the employees’ share of the tax would have the advantage of directing more of the reduction to households more likely to spend it, even reaching [low-income] taxpayers who could not qualify for a rebate on the basis of income tax returns."

Third, the CPBB misunderstands (or is being disingenuous about) the employer-side goals of a payroll tax holiday. The CPBB suggests that the goal of an employer-side payroll tax holiday is to stimuluate business spending and then notes that, if that's the goal, the payroll tax is pretty inefficient. True! But that's not the actual, employer-side goal of a payroll tax holiday. The employer-side goal is to create incentives for employers to hire -- or, at least, not fire -- employees.

[(Chris) McManus]

It's not bad now, so let's make it worse, since it's going to get worse anyway.

Carleton, I don't think it matters long term what we do the payroll tax. Social security obligations are--directly or indirectly--obligations of the treasury. When social security runs a surplus--when we collect more payroll taxes than we pay our in benefits--the surplus is invested in treasury bonds, and the treasury spends the money. So eventually the treasury will have to pay anyway. The payroll tax is just a tax like anything else. It just happens to be the most regressive, unfair tax we have right now.

[tequila]

First, the CPBB is analyzing a two month holiday in a payroll tax. That's not the proposal; the CPBB has constructed a straw man.

Nope. The CBPP paper is specifically addressing proposals for a payroll tax holiday that were floated back during the original stimulus debate, not your proposal.

But the CPBB ignores the CBO when it notes (also correctly) that "A payroll tax holiday that applied to the employees’ share of the tax would have the advantage of directing more of the reduction to households more likely to spend it, even reaching [low-income] taxpayers who could not qualify for a rebate on the basis of income tax returns."

WTF, over? So the payroll tax cut is less regressive than income tax cuts? We already knew that.

And CBPP already said that if you cut employees' side of payroll taxes rather than employers' side, you would achieve a more progressive result. I'll repeat what I already posted:

Suspending employees’ payroll taxes would immediately translate into higher take-home pay for workers. Suspending employers’ payroll taxes, by contrast, would put cash into companies’ coffers, where it is likely to sit as long as sales are weak and factories are operating below full capacity.

True! But that's not the actual, employer-side goal of a payroll tax holiday. The employer-side goal is to create incentives for employers to hire -- or, at least, not fire -- employees.

This is not stimulus, it's paying firms not to fire people. We'd be much better off with a temporary subsidy aimed at that issue rather than cutting taxes permanently and blowing another permanent hole in the budget.

As you said, let's get serious. A good indicator of doing so would be to stop listening to people like Greg Mankiw, who helped create this economic wonderland over the past eight years.

http://politics.theatlantic.com/2009/09/closing_the_book_on_the_bush_legacy.php

[Carleton Wu]

Some folks will claim that a second stimulus is needed because the recession has been much worse than anyone had predicted. We have a technical term for this view: bullshit.

ooh, that's a pretty tough, technical argument to counter. For a four-year-old. And maybe you should try checking out the posting rules. They are easy to find.
(Unfortunately, you've used your high trump too early- that's tyhe best argument you put forward).

It is absolutely true that the Obama Administration misjudged the depth of the current recession

So your argument is that, while the misjudgement of the depth of the recession by virtually everyone might have meant another stimulus, you're just so sure that if the recession had been as big as judged we would still need a second stimulus anyway.
You are just as sure as you were in February. Congrats for consistency. But the only *evidence* you can present is that a second stimulus has been discussed- which can obviously be attributed to the unexpected depth of the recession.
And your nuanced argument against this position: pre-emptive juvenile name-calling. Perhaps you sensed how empty your position was from the get-go.

Let's get serious.

By all means. Maybe start by not repeating the same argument by assertion 20 f&cking times as if volume somehow made up for lack of argument.
I don't know what you hope to accomplish by posting this. Is there anything here that you haven't said before? Is there any new evidence that you'd like to present that you were or are correct?

To choose a random example: me, circa February, 2009:

ooh, why don't we choose the examples where you criticized the stimulus for its infrastructure spending in 2010- how is that position holding up?

But what new program offered by the Obama Administration hasn't been costly?

This GOP talking point has been brought to you by the Dept of Coincidence, just like all of the rest of the GOP talking points von accidentally regurgitates.

[Dantheman]

Chris McManus,

"Carleton, I don't think it matters long term what we do the payroll tax. Social security obligations are--directly or indirectly--obligations of the treasury."

While I do not disagree with you on the substance, the implication of this statement is that Social Security is no more underfunded than, say, the Defense Department or the Supreme Court. Of course, no Republican (especially von) would ever admit to this, as it removes the primary talking point for their campaign to destroy Social Security.

[chmood]

I appreciate the fact that von's posts have some meat to them. Thank you, von!

I kind of like the idea of playing with payroll taxes as a fairly direct, fairly low-impact measure (yes, low-impact); I read the blog you linked to, which published a letter about your proposal, and found it interesting; however, I was expecting an argument in support of your statement that such a plan would be the best way of addressing the issue. No such argument there, so I can only agree w/ Mankiw that it's an intriguing idea Y let it go at that.

Here's another intriguing idea, though I don't think you'll like it: why not do away with the salary caps? Those caps were put in place during a period when even well-paid people made much less than they do now: it's the caps themselves that make these taxes so regressive: over some $90k/yr (I'm approximating), employees pay no more of these taxes.

I suspect we're losing many millions of dollars in tax revenue every year by letting slide those making above the cutoff. At the very least, we should refigure those taxes to include those who make up to 1 million a year, if not revoke the caps outright.

[(Chris) McManus]

Chmood,

Good points. The caps cost A LOT of revenue--"many millions" is a massive understatement. I don't know why revoking the caps sounds radical: you'd be left with a flat tax on wages that doesn't touch investment income, which is pretty much a right-wing wet-dream.

But how is eliminating the caps an alternative form of stimulus? Any tax increase is necessarily contractionary.

[cleek]

remove the caps and lower the rates overall ?

[John Miller]

von, let me get this straight. Hiring people is not considered business spending. That is what you are saying in criticizing the CBPP report. I am notb sure I understand the logic there, but you can explain it I am sure.

We have been through this before. The Bush Adminsitration underestimated the depth of the recession. The Obama adminsitration mistake was using Bush Adminsitration figures. I agree, that was a pretty bad mistake. However, we do know now, and this is supported by numerous "conservative" economists, that bwithout the original stimulus package we woudl have been in a lot worse shape by now.

We also know that the two things you most think belong in a package, tax cuts and unemployment benefits, were a major part of the first stimulus. We also know that the other big mistake the adminsitration made was to try to work with the Republicans and the more conservative Democrats and watering down the original stimulus.

The costs of a payroll tax cut (which would only really be benficial if it was the employees cut only) may or may not be worth it. Whether it would produce as much of a stimulus as the rapidly increasing spending on the infrastructure can be debated.

Also, how long would you set the holiday to be? For all the fears people talk about how the public option is going to lead to single payer, it is probably just as reasonable, if not more so, to argue that this would lead to te abolishment of social security.

[chmood]

(Chris), this is an idea I've had kicking around in my head for years, but I've done little research on it, so I'm not very nuanced on it. I did deliberately underestimate. Federal revenues strike me as germane to any government spending, and a substantial & relatively painless increase would certainly impact the consideration of a second stimulus.

I wasn't suggesting an alternate stimulus to von's, so much as I don't see much stimulative value in a payroll-tax holiday. It will be some unknown benefit to strained family paychecks, true - but is such a measure *really* likely to pull a family back from the brink? It certainly will do nothing for those already over the edge.

Likewise, it will have some unknown benefit for business owners, but I don't see it saving many jobs, or protecting incomes generally, or even saving said business from bring driven under by spiraling costs and dwindling sales.

It's no exaggeration to say that employment is the key to our current distress. People without jobs become homeless, consume fewer goods, demand fewer services, and dwindle as an economic factor as they starve and due. Until THEY can earn the money to feed, clothe and house themselves, business will suffer. Business - and the individuals that control them - should have NO PROBLEM AT ALL exerting them to turn the situation around, as it is clearly in the best interests of business.

Doing away with the caps would be contractionary for the top 10% maybe? Scrapping the caps alone would have virtually no impact on anyone making less than $100k.

I don't know the various rates of the various payroll taxes, but I do know that Social Security and one other have ceilings, beyond which no further tax is collected, once one's YTD wage passes the ceiling (I haven't done any payroll programming in 20 years, though, so I could be wrong by now).

IIRC one ceiling was ~$93k, and the other ~$123k; I'm sure that by playing with the rate, you could both provide a tax cut to those currently below the ceiling, and derive new revenue from those currently above the ceiling. Haven't thought it through at all. Comments, cleek?

[(The Original) Francis]

remember that SS benefits are linked to the total contribution made by the taxpayer. If you lift the cap you can get a lot of money from a somewhat small group of taxpayers for a period of years, but these high-net worth (and therefore likely politically connected) individuals will insist on commensurate benefits when they retire.

[Anarch]

FWIW, tons of people -- Krugman among them -- were predicting that the stimulus was inadequate and we'd need a bigger one down the road. This isn't a terribly exciting position to have taken. What's omitted from your post, von, is the rather telling point that the reason it wasn't larger was that conservatives and Blue Dogs wouldn't permit it; indeed, they generally scoffed at the magnitude of the stimulus in the first place...

In a similar vein, saying "Some folks will claim that a second stimulus is needed because the recession has been much worse than anyone had predicted" is somewhat disingenuous; that is indeed the party line of both the Bush and Obama Administrations, but most folks (at least on the left) have been saying that the recession has been repeatedly underestimated. IOW, not that it has been much worse than "anyone" had predicted, but much worse than politicians had predicted; the Obama Administration to some extent, the GOP to a much larger degree.*

[I'm also amused that you thought it a minor miracle that moderate Republicans could have made the stimulus worse. If we've learned nothing from the past eight years, it's that the GOP can always make things worse.]

* Assuming arguendo that the GOP can take positions that aren't reflexive antagonism towards Obama.

[Fair Economist]

The best stimulus is one directed at reducing waste. Millions of people sitting around unemployed is a huge waste, so do an FDR-style jobs program. Worked then, will work now. It's amazingly cheap for the benefits - the entire employment benefit promised for the stimulus could have been gotten for about $125 billion, instead of $900 billion, with a lot of side benefits from the work that would have been done.

Tax cuts are a lousy way to stimulate. They have multipliers below one for all but the poorest taxpayers, so they cost the government more than the benefit to the economy.

[Jacob Davies]

I agree with Fair Economist. The best thing we could have done is directly hire a large number of people to do reasonably socially-useful work at low wages. It's cheap, it gets some stuff done that wouldn't get done otherwise, and it would sharply tighten the market for low-wage labor - better than a minimum wage. Finally, by employing every able & willing person it would help many long-term unemployed or never-employed people by introducing and re-introducing them to structured full-time work. A lot of people can't get a job because they haven't had a job in a while, or they've never had one.

As a strictly bottom-up measure with no cream to siphon and with effects likely to make things more expensive for low-wage employers it is of course anathema to all right-thinking people, just as FDR's similar programs were. FDR had the balls to do it. I'm coming to the conclusion that Obama & today's Democrats do not. (For "balls", please feel free of course to substitute your choice of anatomical analogy for bravery.)

The other good stimulus would be introducing a public universal healthcare plan, training a lot of new healthcare workers, and getting treatment to people who badly need it. Not only is the stimulative effect of health spending very high, but you know, people need healthcare.

Again, if one had the will to do it, you could get that rolling in a year. The health fairs in sports arenas and convention halls show that you don't need much setup to provide basic care. Throw some money at it, increase the visa quotas for foreign doctors, maybe provide a cash bonus for doctors who move to the US and stay, and it could get done.

For households in distress more money will mean more spending - but most households are not distressed, and tax cuts tend not to hit the ones worst affected since those people don't have jobs or income. A payroll tax cut is far too broad a measure - only some of the recipients would make stimulative use of it, and it would disproportionately accrue to people who make more than average. It would also set a bad example for the future by eroding the universal basis of funding for Medicare and Social Security. "Fictitious" though it is - though no more than any other accounting - it ensures the security of those systems.

So, back to the first point, the best way to get money to households in distress is to get jobs to the people in them. WPA 2.0 would do the trick. We just need someone with the ____ (fill in the blank) to push it through, ignoring the idiot media who would complain about the "pointless work" people were sent to do. The point, of course, is not the work; it's the jobs.

There's a reason FDR was the most popular president of the 20th century. I wish Obama would pay more attention to what he did.

[Jacob Davies]

Incidentally I agree that the cash for clunkers program was poorly-designed and inefficient, which you could tell from the fact that it was massively oversubscribed. The goal was to stimulate as many car sales as possible; the fact that it was oversubscribed means that the payments were too large - smaller payments would have triggered a larger total number of car purchases, or at least cost less.

And while clunker programs are an effective way of getting gross polluters off the road they don't need to be directly tied to new car purchases - in fact the people driving the clunkiest cars are not likely to be the kind of people able to buy a brand-new car. They still stimulate the new car market because previous clunker owners need to buy a used car to replace theirs, and two or three transactions down that replacement chain is the buyer of a new vehicle who is able to get a little more for his trade-in.

Most clunker owners would turn their cars over for a lot less than what the federal program was offering. In California it was $1,000 for a while; that seems to be plenty when you're talking about cars that are more than 15 years old.

[Jay Jerome]

Jacob Davies says: "We just need someone with the ____ (fill in the blank) to push it through, ignoring the idiot media who would complain about the "pointless work" people were sent to do."

If they were smart (the problem in a nutshell) they could come up with media-friendly jobs for work-creation programs.

Teachers' Aids for instance. Here in the LAUSD school system, with all the cutbacks and layoffs, the classrooms are stuffed with 40 or 50 kids, and only one teacher. You could hire a million teacher-aids, improve reading and math scores, end up with a generation of better educated kids, and the press wouldn't be able to knock that.

Unfortunately, Obama's no Roosevelt. FDR was smart, and tough, and an experienced politician before he became President: a State Senator, Assistant Secretary of the Navy, Governor of New York - a savvy wheeler-dealer who knew how to work the system. His administration hit the ground running, and fast as you could say CCC a quarter of a million young men were at work, and the nation saw them swinging axes and poking shovels in newsreels and on newspaper front pages throughout the country.

For all Obama's talk about putting people back to work, with sixty percent or so of the 787 billion dollars in stimulus money sent into the economy, where's the jobs? And why is 30% of that 787 billion sitting in limbo? And where's the ghost of FDR when you need him?

[mckinneytexas]

Tequila writes, "Suspending employers’ payroll taxes, by contrast, would put cash into companies’ coffers, where it is likely to sit as long as sales are weak and factories are operating below full capacity."

Not likely--in order for an employee to get the benefit of a payroll tax roll back, he/she has to be employed. If a business goes belly-up or lays off staff because, inter alia, it cannot afford to pay the matching tax, the intended beneficiary of your roll back becomes part of another statistic: the unemployed.

What I find interesting about the progressive left is its assumption that it can beat businesses silly with higher taxes (end the FICA cap!) and regulations and yet people will still keep their businesses open. Please. There seems to be this fantasy that business owners make so much money that they can easily afford and will have no objection to paying substantially higher taxes, increasing employee benefits and--who knows--shortening the work week to 35 hours.

You can have jobs, reasonable benefits and reasonable levels of taxation or you can have California's economy as a national phenomena. So far, the recessionary impact on Texas has been light, in large part because the tax burden and the cost of living are low. Yes, we have a high level of uninsured--yet, they are working. As I mentioned some weeks back, you can't eat health insurance or pay your rent with it.

[AndrewBW]

It's not your proposal von, but care to comment on the Times' story today "Support Builds for Tax Credit to Help Hiring"?

http://www.nytimes.com/2009/10/07/business/07tax.html

[(Chris) McManus]

Federal revenues strike me as germane to any government spending, and a substantial & relatively painless increase would certainly impact the consideration of a second stimulus.

But you don't want to try to raise revenue in a recession. You're trying to raise the level of aggregate demand. Government spending increases aggregate demand (expansionary), while taxes decrease aggregate demand (contractionary). Raising taxes to fund new spending programs is not good stimulus because the contractionary effects of the tax increase will offset the expansionary effects of the spending.

You're right that the tax increase will only affect high-income people, while the spending would benefit everyone. It would thus lower income inequality. That's desirable for its own sake, which is why I support removing the caps--the payroll tax is simply unfair. Reducing inequality also tends to have a stimulative effect because poor people spend a greater percentage of their income.

But if you're primarily concerned with fighting a recession, what you want is deficit spending--spending not paid for by current taxes.

[Pericles]

McKinney is absolutely right. This is just another stupid liberal plan to bankrupt the country. This () idiot actually WANTS TO RAISE THE DEFICIT! All you need to do is compare the economies of Texas and California. Point, set, match, CONSERVATIVES WIN!

[Rob in CT]

"And where's the ghost of FDR when you need him?

Posted by: Jay Jerome"

Having read many of your posts here, I cannot imagine for a moment that you would do anything but scream bloody murder if Obama had acted like FDR from the get-go. That said, I too would prefer some more bold action re: job creation. This has been a jobless recovery so far.

"McKinney is absolutely right. This is just another stupid liberal plan to bankrupt the country."

Sadly, both self-styled conservatives and liberals appear to have worked long and hard to bankrupt this country. The situation we find ourselves in now is an ugly one, and there are basically two options:

1) Let it crash, hard; or
2) Borrow and spend in an effort to soften the landing.

Our government, starting with Bush, et al. and continuing/accelerating under Obama and the Dems, picked #2. The historical track record of #1 is poor. The historical track record of #2 is so-so (we'll likely never fully understand how much of the recovery from the Great Depression was due to FDR's policies and how much was WWII and the post-war advantage the US had, having not been bombed to hell and gone). We've borrowed from the future to try and dig ourselves out of a mess in the present.

I, for one, can't imagine the poll data on a second stimulus would be any good.

[russell]

Is there any evidence to indicate that employers are not hiring because of the cost of their half of FICA, as opposed to pessimism about whether and when the economy will recover and demand will increase?

If the reason for slow jobs creation is the latter, it seems like businesses would generally respond to a tax cut by putting it in the bank, rather than taking on new workers.

I could see this as a good plan if the only thing holding employers back from hiring was the cost of paying their folks. I doubt that's actually true, my general impression is that most industries are still looking at excess inventory and slack demand.

What would they hire these folks to do?

Some evidence that slow jobs creation is primarily due to the associated tax burden, as opposed to the general laxness of the economy and consumer demand, would make this argument more convincing.

[cleek]

Yes, we have a high level of uninsured--yet, they are working.

TX unemployment rate is currently around 8%.

that's better than most states, but it's hardly fantastic.

[Bernard Yomtov]

As Russell says, the issue is demand. Cutting taxes on businesses won't get them to hire if no one is buying their products. You could cut the employee share of FICA, I think, and get some results.

I also like Jacob's idea about hiring, though we could expect endless complaints about government "make-work" programs.

Obama's error, IMO, was not in getting too small a stimulus. That was inevitable. His mistake was in not asking for a much bigger one to begin with. Had he asked for that, and gotten what actually passed, he would be on much firmer ground now in going back for a second round.

[von]

Smoke meth! In the short run you'll be pretty healthy, and in the long run you were going to die anyway, right?
Seriously, this is the worst thinking Ive seen recently by an adult. It's not bad now, so let's make it worse, since it's going to get worse anyway. Even more worse, who cares, it's not rich people right?

Carleton, your analogy is pretty terrible. The Social Security system is currently in surplus. That surplus is currently being diverted to support other deficit spending, which would include Obama's proposed second stimulus. So, under your analogy, the "meth" is already being smoked and Obama's second stimulus would require you to smoke more of it.

I'm not even sure how to salvage your point from this mess, which I assume is something along the lines of: Man, it's terrible that the SS surplus is not being carefully reinvested in accounts that don't have to be someday repaid by future taxpayers (generational IOUs). And I agree with you: it's not ideal. What does this non-ideal situation have to do with my payroll tax suggestion? Nothing.

[von]

Here's another intriguing idea, though I don't think you'll like it: why not do away with the salary caps? Those caps were put in place during a period when even well-paid people made much less than they do now: it's the caps themselves that make these taxes so regressive: over some $90k/yr (I'm approximating), employees pay no more of these taxes.

Chmood -- Two thoughts, in reverse order to yours:

First, the caps don't themselves make payroll taxes regressive. The payroll tax is also a flat tax. Its marginal burden is heaviest on those with the fewest dollars to spend.

Second, regarding support for a payroll tax holiday, see this recent piece by the Brookings Institute:

If policymakers wish to stimulate consumer spending through temporary tax reductions, a cut in the FICA payroll tax offers a couple of advantages.

First and probably most important, it is comparatively straightforward and would be inexpensive to administer. It can be implemented with little delay. The IRS does not need to process a year’s worth of income tax returns in order to determine who is eligible and the size of the rebate. Second, a FICA tax cut would reduce the marginal tax on labor earnings faced by workers or employers (or both). This may slightly improve labor market incentives and speed job market recovery. Finally, depending on the way the FICA tax cut is designed, it can be targeted on workers in the middle and at the bottom of the earnings distribution. These are the workers who are most likely to respond to a temporary tax cut with a spending increase.

The article suggests a fix for those worried about the impact on the SS system, and also addresses the weaknesses in a payroll tax cut/holiday. (I'm not claiming cutting the payroll tax is a panacea or without downside, only that it's better than the alternatives.)

[von]

As Russell says, the issue is demand. Cutting taxes on businesses won't get them to hire if no one is buying their products.

Yes, but a payroll tax cut also incentivizes business not to fire.

This monolithic focus on demand is the fault of Keynesian economics, which trumpets demand as an engine of growth, even though it's not actually a part of Keynesian economics.

[(Chris) McManus]

This monolithic focus on demand is the fault of Keynesian economics, which trumpets demand as an engine of growth, even though it's not actually a part of Keynesian economics.

Sorry, I don't get this. If it's not actually part of Keynesian economics then how could it be the fault of Keynesian economics. Are you suggesting that Keynesian economics does not focus on demand? I'm not sure exactly what you mean by "engine of growth." I am pretty sure, however, that Keynes did recommend increasing aggregate demand to reduce unemployment during recessions.

[russell]

Yes, but a payroll tax cut also incentivizes business not to fire.

As is the case for hiring, I think most businesses decide to fire people when keeping them no longer results in added value.

In other words, if there's nothing for them to do, no productive effort to direct them toward, then they will go, no matter if they can be kept cheaply or not.

Businesses *are* generally reluctant to fire folks if there is some expectation that things will turn around, because it can be less expensive to carry existing employees for a little while than to hire them (or someone else) back later.

In that context, there are likely some shops where not having to pay FICA will make a sufficient marginal difference that some jobs may be saved.

But net/net, if employers don't see a way for the employees to generate value, either right now or in the pretty near future, making it marginally less expensive to pay them is not going to change their minds.

It's like saving 10% on a new suit when you don't need a suit at all.

I don't have a particularly strong opinion on whether a payroll tax holiday would be good, bad, or indifferent. Workers would probably spend the money, businesses would probably put it in the bank or invest it back in the business, perhaps but certainly not necessarily in the form of employees.

But in the current context I don't see a convincing argument that it would result in a significant net creation, or even retention, of jobs.

[Jay Jerome]

russell: "my general impression is that most industries are still looking at excess inventory and slack demand."

Get used to it. That's the prognosis for the US economy, for the short run. On Bloomberg today they announced oil demand was waning-- an early indication the 'recovery' was relapsing (no business, no sales, no oil for transporting goods, etc.)

And probably for the long run too. Because we no longer are able to compete in the world as a manufacturer of goods. We buy way more then we make, import more than we export. Check the shelves at Target or WallMart or CostCo and see how many Made In The USA labels are on the products we buy. If you disproportionately spend more then you earn, you eventually go broke. To survive in the long run, we need to create wealth -- And Pixar animations and Windows operating software and overseas sales of The Housewives Of Atlanta won't close the deficit gap.

[Jacob Davies]

The whole discussion around which little tweak where will magically produce 4 million jobs reminds me of endless numbers of conversations in programming concerning the elegance or lack of same in a given solution to a given problem.

Programmers, like economists, are system-builders; they admire elegance and mathematical insight, especially the ability to make a small change and cause a large difference. All of which is fine some of the time, but much of the time what you have is a problem and what the problem needs is a solution - and you do not have the time to find the most elegant, least invasive solution, particularly if that means - as it usually does - a lot of experimentation in learning what works and what doesn't, when testing novel approaches. Programmers often want to solve not just this problem but all problems of this class, which is admirable, but very often they want to do that before discovering how to solve the singular, actually-occurring problem in front of them.

Our problem is unemployment, and what we need is employment. We don't need the absolute most elegant route to increasing employment based on tweaks to the tax code and the lightest possible touch of the government. We don't need a general theory of depressions that provides a full theoretical model. We know the problem and we know the solution.

As I have said many times: just write the damn code that you know will solve the problem, and stop worrying about whether it's sufficiently elegant. Just do it.

The same goes here. We know what fixes unemployment: employment. So just hire people - or pay for projects that will directly result in hiring people - and let's skip all this purely-hypothetical arguing about whether a tweak to the payroll tax might or might not result in more hiring, which is based on pure speculation and no actual experience.

[Bernard Yomtov]

Yes, but a payroll tax cut also incentivizes business not to fire.

At the margin, hiring and not firing are very close to being the same thing. Both are decisions about the number of employees, and those decisions depend heavily on demand.

[mckinneytexas]

It's easier to not hire than to fire, especially in a small business with employees you like.

As I said earlier, a cut in FICA matching would not play a role in any hiring decision I would make nor would a 3K tax credit.

Burdening the business and investor community with higher taxes is not going to spark the economy under any circumstances. Believing so is fantasy driven ideology. Taxes are as much a cost of doing business as rent or payroll or cost of goods sold. Add to the expense side with higher taxes and look for a countervailing cut, usually in payroll.

There are no quick fixes, no happy near term endings to this situation. More spending--an economic surge--is a stop gap with deferred consequences that outweigh any present value.

[Phil H]

"The current stimulus package is too small on the front end and too bloated and unfocused on the back end. It wasn't a stimulus bill so much as a grab bag of goodies. Of course we can't rule out another stimulus package, because we didn't do a proper stimulus package the first time."

This sounds like you should *endorse* a second stimulus bill. Tax cuts are a horrible idea during this recession - businesses are not looking to spend money - any spending change will largely occur on the consumer end.

Guess they don't do voodoo like they used to.

[Vladimir]

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