Friday, February 12, 2010

How Not to Write a Jobs Bill

New York Times editorial "How Not to Write a Jobs Bill" (February 11th, 2010) makes a reflexive claim about jobs and tax cuts that may not be valid. Specifically, the Times argues that tax cuts are unconnected to jobs. Further, it appears to support creation and maintenance of governmental jobs.

An $85 billion proposal put forward Thursday morning by Max Baucus, the chairman of the Finance Committee, and by Charles Grassley, the committee’s top Republican, scarcely began to grapple with the $266 billion in provisions for jobs and stimulus that President Obama proposed in his budget. It was not even in the same league as the modest House-passed $154 billion jobs bill.

Worse, about half of the proposal had nothing to do with new jobs. The single largest chunk, about $31 billion, went to renew expiring tax breaks that are generally useful but unrelated to jobs. Another $10 billion would renew an expiring Medicare payment formula so doctors wouldn’t face a pay cut

Harald Uhlig's 2010 Working Paper "Some Fiscal Calculus" suggests that in the long run, a discounted $2.60 is lost for every dollar the government spends, while tax cuts on labor offer up to $1.7 in gain. The relevant idea is that removal of distortionary taxes improve outcomes, while short-run multiplier benefits are temporary and small.

While time Times mentions tax cuts on labor, it focuses on fiscal aid to states and increasing the supply of government jobs. The Times demands more government jobs:

What senators don’t understand or choose to ignore is that state budget cuts mean layoffs. State and local governments are among the nation’s largest employers, responsible for 15 percent of the labor force, about the same share as the health care sector and far larger than manufacturing or the financial sector. Since August 2008, states and localities have eliminated 151,000 jobs.

From the perspective of Corrections, this may be good news for the economy. In "The Current Financial Crisis: What Should We Learn from the Great Depressions of the Twentieth Century?" (March 2009) Federal Reserve Bank of Minneapolis Working Paper, Gonzalo Fernández de Córdoba and Timothy Kehoe, reporting that sharp productivity drops are a main contributer to depressions, write:

With banks and other financial institutions in crisis, the government needs to focus on providing liquidity so that banks can provide credit at market interest rates, and using the market mechanism, to productive firms. Unproductive firms need to die. This is as true for the automobile industry as it is for the banking system. Bailouts and other financial efforts to keep unproductive firms in operation depress productivity. These firms absorb labor and capital that are better used by productive firms. The market makes better decisions than does the government on which firms should survive and which should die.

Corrections suggests the same goes for one of the few employers whose labor productivity appears fundamentally disconnected from wages, and whose labor allocation is distorted by a labor force that is 36.8% unionized, a figure that is approximately the highest private sector union density ever reached, in the mid 1950's. Government job shrinkage appears to serve a double purpose: increase productivity in the long run as well as serve as a (Ricardian) tax cut in the short.

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