by Chidem Kurdas
Today President Obama is holding a jobs summit, with the professed goal of soliciting ideas to encourage businesses to hire. Short-term tax credits for employers are among the measures mentioned.
Yesterday here on ThinkMarkets Mario Rizzo pointed to the distorting impact of such proposals and cited Gary Becker’s argument that cutting income taxes is a better way to stimulate employment. There is another type of distortion – related to the highly informative back and forth by Jerry O’Driscoll and Roger Koppl on Mario’s post – that should be spelled out. Even as the economy recovers, government-created uncertainty is going to discourage hiring.
Payroll taxes account for a significant chunk of the cost of labor. Roger suggested a temporary reduction in payroll taxes, or FICA. Surely these taxes are a major drag on employment. But as Jerry argued, a temporary tax cut won’t create permanent jobs.
Most hiring is forward looking. Employers think not only of the cost right now but future costs. Not only will future raises in payroll taxes dwarf any temporary tax credit, even worse, their full extent is unknown. Consider that payroll taxes include the Medicare tax, which will likely surge in the not-too-distant future, given the way Medicare spending is rising.
Meanwhile, in their wisdom Congress and the administration are concocting an employer medical insurance mandate that promises to be a sinkhole for money, even if premiums don’t rise any faster than they’re already rising, as the Congressional Budget Office claims will be the case.
The bottom line is that somebody will have to pay for the increased use of medical services; taxes on “Cadillac” health plans won’t be nearly enough, especially if people move out of those plans, as the Congressional Budget Office also predicts.
Who is going to pay how much remains obscure, so the future cost of labor is uncertain. Maybe there are employers who will hire now to get a short-term little tax credit and take on unknown but potentially gigantic liabilities imposed by the government in the future. However, there can’t be a large number of employers who are that dumb and remain in business.
Payroll taxes and mandates are just one type of barrier. Richard Epstein recently wrote about the many laws and regulations that impede the creation of jobs.
But the handicaps imposed on private hiring are not a problem for proponents of expanding the government sector. Weak private employment is used to justify a 1930s-style public works program—which, as Jerry reminded us, in fact did not work. However, the $400 billion-plus package now proposed by the left-liberal Economic Policy Institute includes a $40 billion-a-year public employment program that received Paul Krugman’s approval.
Unemployment really is a nasty social ill and the government should indeed tackle it—by putting its own house in order. It should restrain Medicare spending, permanently reduce payroll taxes and refrain from employer mandates. Of course, that’s all been said before, but given that the Obama administration and this Congress look to go in the wrong direction, it needs to be repeated.
The jobs summit is meant to persuade people that the government is doing what it can to combat the joblessness caused by the private economy. We need to be clear that the government itself is tamping down big time on private hiring— even as officials and politicians protest otherwise loudly and often. This shows in the medical entitlement bill, laden with mandates and regulations that will discourage hiring for the foreseeable future.
True, that won’t bother someone who wants to expand public and quasi-public jobs at the expense of private ones. The only constraint on politicians is that not all the people will be fooled by various dog-and-pony shows and will assign the blame where it belongs. One hopes.
ThinkMarkets 
In today’s New York Times there is an editorial on this subject:
It is so economically ignorant. In addition to distortions created by monetary policy they want to add various unsustainable lines of employment by fiscal tricks.
Of course, lowering or abolishing the minimum wage is not something they advocate.
The moral of their story is the Krugman (aka pop-Keynesian) line: Stimulating employment by various tricks is costless. We will be repaid in more output. And furthermore, the people will take comfort in knowing that their government loves them.
I could write their editorials in my sleep.
I can tell you from firsthand experience that until the uncertainty about new healthcare related employer mandates is resolved, few companies will be looking to take on new workers; especially at the margin where healthcare mandates could comprise a large part of the employee costs … namely low skilled workers, who have been most impacted by recent unemployment.
What’s so annoying is that Congress is making the current situation worse, by increasing the uncertainty. I don’t know how (or if) economists can put a price on uncertainty, but it surely has a real world cost on businesses (and workers).
You make a great point about government-created uncertainty, Chidem, which relates to Robert Higgs’s notion of “regime uncertainty” and my work on Big Players. I’m reminded of the old joke about optimal government policy: “Don’t do something, just stand there!” Unfortunately, that message never really sinks in.
Roger, it’s true, it’s not an easy message to persuade people with. However, it may be useful to focus on getting the government’s own house into order. And the matter of FICA that you brought up, which is surely a major issue.
Marco, I don’t know of any way to quantify the impact of the added uncertainty of employer healthcare mandates. I like your point about its effect especially at the margin. It’s not Goldman Sachs partners who will be hurt by this.
I’m still waiting for Krugman to implement a work sharing policy for his column and blog output.
Roger, today “just stand there” isn’t good enough, as you well know. The advice should be, “Don’t just stand there, UNdo something.”
Chidem, a clarification please: How can we argue the payroll tax burdens employers if we also argue that most or all of the tax is actually paid by workers?
Sheldon, very good point. I believe employers make a matching contribution, so on one level the tax burden is shared. However, looking deeper, no question wages would be higher if the employer did not have to pay payroll taxes. In that sense workers pay most of it.
Eric, yes, if we all get to share Krugman’s column, we might become more supportive of his jobs creation notions.