JULY 12, 2011.
Our National Jobs Emergency
Immediate government spending cuts would only make things worse. A new jobs tax cut for companies repatriating their profits could help.
By ALAN S. BLINDER
Last Friday's employment report landed with a loud thud. Only 18,000 net new jobs in June? How could that be? One Wall Street economist said he thought it was a misprint at first. He was not alone.
The horrific June employment number made it two in a row. With the latest revisions, job growth in May is now estimated to have clocked in at only 25,000 jobs. So that's 25,000 and 18,000 in consecutive months. Given the immense size of total U.S. payroll employment (around 131 million) and the sampling error in the survey, those numbers are effectively zero. Job creation has stopped for two months.
If we were at 5% unemployment, two bad payroll reports in a row would be of some concern yet tolerable. But when viewed against the background of 9%-plus unemployment, they are catastrophic. And going beyond the headline jobs numbers reveals an even bleaker picture.
The fraction of the population that is employed (58.2%) is now lower than it was when the recession officially ended in June 2009 (59.4%). The share of the unemployed who have been jobless for more than six months is now a stunning 44.4%. In a strong labor market, that number would be in the teens. I could go on.
All this adds up to a national jobs emergency. Tragically, however, it is not being treated as such. When is the last time you heard one of our national leaders propose a serious job-creating program?
The operative word here is "serious." Every day brings new proposals to slash government spending. But as I noted on this page last month, those are ways to kill jobs, not create them. As a matter of fact, despite all the cries of "big government" or even "socialism," public-sector employment has been falling.
Over the past two months, while private businesses were adding a measly 130,000 new jobs to their payrolls, governments at all levels were shedding 87,000 workers. Looking over a longer period, public employment at all levels is down by 522,000 jobs over the last two years. Does that make sense in a jobless recovery?
We may be on the verge of doing much worse. If we crash into the national debt ceiling next month, Washington will be forced to reduce its rate of spending by 40%-45% immediately. Do the math. The implied reduction in federal spending would be equal to about 10%-11% of gross domestic product. If cutbacks of that magnitude were maintained for more than a very brief period, it is hard to see how we could avoid another serious recession.
Worse yet, this little back-of-the-envelope calculation ignores the financial panic that might ensue. Since markets are thoroughly convinced that Congress will raise the debt limit on time, a failure to do so would come as a big shock. Shocked markets are often panicky markets. And panicky markets can devastate economies.
Important as it is to get the debt-ceiling issue behind us, that would only preserve a pretty miserable status quo. What might a real job-creation program look like?
Let's start with an admission—two actually. First, there are no magic bullets. Nothing policy makers can do will fill the employment hole quickly. We're talking about mitigation, not cure. Second, there is no such thing as a free lunch.
Creating jobs costs money—whether it's via tax cuts or more spending. (The Federal Reserve normally can create jobs without budgetary costs, but with interest rates already near zero it says it's out of ammunition.) If Congress and the president are fixated on reducing the federal budget deficit to the exclusion of all else, we are not going to make headway. So yes, let's enact a major deficit reduction program right away, but start the cutbacks only in the future. For now, we need a jobs bill.
What are some realistic options? For several years many economists have promoted a tax credit for new jobs. (I advocated the idea on this page in November 2009.) While the details matter, the basic idea is to offer firms that boost their payrolls a tax break. As one concrete example, companies might be offered a tax credit equal to 10% of the increase in their wage bills (over 2011 levels, say). No increase, no reward.
You might think Republicans would embrace an idea like that. After all, it's a business tax cut and all the new jobs would be in the private sector. But you'd be wrong. Frankly, I'm not sure why. Maybe it's seen as "left-wing social engineering."
A variant may hold more promise in the current political environment. Major corporations are clamoring for a tax holiday that would let them repatriate profits held abroad at a bargain-basement tax rate. They claim that all kinds of wonderful things would happen if this money came home. Trouble is, we've seen this play before, in 2004, and nothing wonderful happened—unless you were a shareholder or executive of one of the beneficiary corporations.
However, the tax holiday idea can be married to the new jobs tax credit. Suppose we allow firms to repatriate profits at some super-low tax rate, but only to the extent that they increase their wage payments subject to Social Security. For example, if XYZ Corporation paid wages covered by Social Security of $1.5 billion in 2011, and then boosted that amount to $1.6 billion in 2012, it would be allowed to repatriate $100 million at a tax rate of 5% or 10% instead of the usual 35% rate. The tax savings to the company would thus be $25 million-$30 million for raising its payroll by $100 million. That's a powerful incentive.
There are two main reasons for using Social Security wages as the base. The first is administrative simplicity: Every company already reports this number to the government, and it is next-to-impossible to "game" it without committing outright fraud. The second reason is fairness. Companies would be able to claim the full tax credit only for earnings under (in 2011) $106,800. No subsidies for raising executive pay.
There may be better ideas. We should be open to them. But sitting by passively is no longer acceptable. In fact, it constitutes cruel and unusual punishment of the American work force. Isn't that unconstitutional?
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Mr. Blinder, a professor of economics and public affairs at Princeton University, is a former vice chairman of the Federal Reserve.
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