Why The Job Creation Plan Won't Work

So, banks like Bank of America and Citigroup have repaid about $200bn of the TARP money. The Obama administration has decided to use this money and stimulate job growth. Sounds great, right? Well, it would be if they designed the plan to work. There are two components to the plan. $100bn is for extending unemployment benefits and Cobra insurance (government insurance for the unemployed). The other $100bn would be used as tax cuts and tax credits to small businesses that hire workers (or so it seems). In other words, the government would waive things such as the social security tax. This would reduce the cost of hiring new workers and *should* increase job growth.

Unfortunately, I don't think this will work. The main reason is that aggregate supply is not the issue, and tax breaks to increase workers is aimed at increasing supply. After all, the only way a company is going to hire an extra worker is if that worker will increase production. Considering, though, that consumers are not demanding what is currently being produced, there is no reason for companies to hire more workers, even with the extra incentives. Why hire someone who isn't going to earn the company more revenue? This should all sound very familiar. Tax cuts and credits for companies? That sounds like trickle-down Reaganomics, which, as many of you already know, I disagree with.

If the job stimulus that Obama wants is going to work, it is going to have to focus on increasing demand. Therefore, I propose that the Obama administration use the money to do two things. First, which is nothing different than what I've been proposing all along, cut taxes on the lower class. These are the people who will spend most of the extra income, stimulating demand and prompting companies to hire more workers. Second, directly hire the unemployed workers into government jobs or through a government job creation program that will directly give workers jobs instead of hoping companies will go for the incentives. This will do both, decrease unemployment AND provide health insurance and social security benefits for the short run. Then, when demand increases (and it will, as people will have income to spend), the companies that need to hire new workers from these government jobs. What is important to take into account is that this is not meant as a long term solution, just as a short term thing to increase employment until companies begin to hire again.

However, what about all the people talking about the deficit? Many fiscal conservatives and deficit hawks complain about the job stimulus and say that the Obama administration should use the TARP money to pay off the deficit. When it comes to the deficit, I tend to go by the Clinton idea: "Take care of unemployment and the deficit will take care of itself." When unemployment goes down, tax revenues go up and spending on welfare and unemployment goes down. The extra tax revenues help pay off the deficit. Therefore, right now with unemployment at 10%, it should be no surprise that there is a deficit. Once we bring that number down, the deficit will begin to decrease naturally, similar to how it did in the 90s.

Unfortunately, I don't think any of what I've proposed will be looked at. For starters, the Obama administration is trying to earn points with republicans by implementing a supply side policy for job creation, even if it wont work. Secondly, the government creating jobs directly instead of letting the market do it? That socialism! And we can't have no socialists coming in and messing with religious deity that is free market ("invisible hand"). That would be un-American, just like city folk and educated people.



-The Economist