The Stash

Explaining Job-Creation to the Small Business Lobby


There are a number of reasons to be wary of the job-creation tax credit now gaining traction in the White House and on the Hill--chiefly, that it would provide a windfall to companies that were about to hire people anyway. (And, perhaps more interestingly, that it could actually delay hiring, as companies put off hiring in anticipation of the tax credit.) But I just don't understand this criticism from the National Federation of Independent Business, via today's Times:

But critics of the idea argue that businesses hire based on actual demand for their products, and a minor subsidy for adding an employee will not make up for the collapse in demand across the broader economy.

"Why would a business hire a new worker?" Bill Rys, tax counsel to the National Federation of Independent Business, a small-business industry group, said. "They’re hiring because they need to do work. Unless you have work to do, it’s still an expense."

I guess I don't get this for two reasons:

1.) Isn't the credit in the NFIB's interest even if it's not effective? That is, if you're going to hire the same number of people with or without the credit, why not just do your hiring, pocket the extra cash, and keep quiet? Could this be a rare outbreak of integrity in the business lobby, or is there some other angle I'm missing?

2.) The economic logic of Rys's statement is dodgy. Yes, of course you're not going to hire a new employee that costs you $50,000 just to get a $7,500 tax credit if you have nothing for that person to do. Pissing away $42,500 isn't much better than pissing away $50,000. But economic decisions are made at the margins. And you can certainly imagine a business where an additional employee might bring in $50,000 or $60,000 in new revenue (or whatever), in which case the worker wouldn't have been worth hiring at $50,000 a year, but suddenly becomes worth it at $42,500. The point is to stimulate job creation at firms where the hiring decision almost makes sense but not quite, which is pretty much the way all financial incentives work their magic. In the same way, I'm not going to buy a new car if I don't need a new car. But I might buy a new car if I only have $10,000 to spend and the car I was eyeing suddenly dropped in price from $11,000 to $9,000.

Now, unlike a car, the idea is to keep paying an employee even after the tax credit expires (sounds like that would be after two years). But presumably the economy would have improved by then and the new hire would be sustainable. In that respect, I guess the effect wouldn't be to create jobs that wouldn't otherwise exist but to create them sooner than they'd otherwise appear. But that timing matters quite a bit to the people being hired and to the economy as a whole. The Times piece suggests the proposal could create (or, I guess, accelerate the creation of) between a million and two million jobs. At a time when we're losing 200,000 jobs each month, having a million jobs materialize a year or two early strikes me as a pretty big deal. (In fact, it potentially creates a virtuous cycle in which rising employment leads to more consumption which leads to more economic growth and more employment...)

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