What Matters: Hire people, retire things

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Hire people, retire things

19 July 2011

Is the country’s only choice either to go off the debt cliff or accept structural sky-high unemployment? (When one includes those who would like a job but who cannot find one, the Get America Working! analysis finds that the United States is short 80 million to 85 million full-time-equivalent jobs, many times the official measure.)

That is the lose–lose choice the current framework gives us. It is a bit like the 1920s and 1930s, when policy was constipated by the dead hand of the “gold standard.”
There is another way, and in fact, most of the rest of the world is beginning to move in this direction: change the relative price of people versus things. This is the most fundamental choice any economy makes and one that is as responsive to price signals as any other.

Here is how to do so. Reduce the cost of hiring people 17 percent by eliminating payroll taxes. And keep the budget in balance by adding equivalent taxes on things (materials, energy, land, pollution), which, of course, increases the price of things.
The combined result is a 30 percent price shift—a hugely powerful catalyst. By breaking out to a new framework, we would:

increase employment over a capital cycle by roughly 40 million full-time-equivalent, new, permanent, sustainable, chiefly good jobs.
reduce today’s huge dependency costs to individuals, families, businesses, and government very substantially.
cut away at the roots of a very large part of our hugely expensive social costs (health care costs especially, crime/violence/fear, demotivated students, etc.).
create as powerful an incentive to conserve natural resources as we have created for job creation.
do all this through a tax switch—a simple price signal—which is a mechanism well accepted across the entire ideological spectrum. It is efficient, entails no picking of winners and losers, and does not require a new bureaucracy and therefore is free of corruption and delay. It is seen by some conservatives as a way of backing out of avoiding case-by-case environmental regulation. Conservative economists are sympathetic, not least because they perceive this tax switch as merely undoing a price signal that was sent thoughtlessly as payroll taxes went from 1 percent to roughly 40 percent of federal revenues.
achieve all this without one dollar of additional debt.
benefit from a larger and faster-growing economy with fewer costs—which would allow a win–win choice between a reduction in tax rates and/or increased public expenditures on long-ignored matters.
produce a huge political alliance of older people, those with disabilities, women, young people, minorities, many immigrant groups, those who have been institutionalized, anyone who cares about any of the above, labor groups, most businesses, and those advocating for the environment.

The logic of this new framework is simple Economics 101. The evidence is persuasive. For example, the OECD¹ countries with payroll taxes over 40 percent on average have an 11.5 percent smaller proportion of their population working than those with payroll taxes lower than 30 percent. (The tax switch proposed above should have roughly twice the impact since it changes both sides of the price comparison.)

This is a giant win: huge economic, social, and environmental benefits; a simple, effective tool that will make it happen and that is acceptable across the entire ideological spectrum; and a huge political win. Those are usually the three prerequisites to action.

What then is holding the country back?

This is a new framework, a different way of seeing reality. Senator Dick Lugar, former vice president Al Gore, and a growing number of others across the spectrum are there. As John Maynard Keynes was there in the 1930s.

This is where you can make a big difference. Have courage, speak up, and help the country escape another 1930.

¹ Organisation for Economic Co-operation and Development.

Comment [9]

Agree? Disagree? Let us know what you think. Please include your full name with your comment. Comments may be edited.

A corresponding shift in focus and national level dialogue from labour productivity to energy productivity as a key measure of economic success would support this process – after all labor productivity = unemployment. It does not drive growth, it just creates a requirement for growth.

That said, from an individual commercial decision makers point of view, how cheap does labor need to get before it begins to compete again with energy/material options (IT, robotics, etc).
Culturally, are we willing to go ‘back’ to 4 people doing a job a machine could do (repetitive, low autonomy, no prospect for advancement) with the attendant organizational structures.

Posted 5 August 2011, 22:56 by Leena
Perhaps what we might do, like we do at home, is look at what actually needs to be done and what is waste. What we do at “home” is look at what needs fixing, repairing, cleaning, planting and constructing. We can also look at the world but that may be a next step after we take care of what we have primary responsibility for.

No family would survive long the way we allow our governments around the world to spend and live in major debt.

Of course we have to pay for all that we want to do so we have to look at where the money is to come from; we look at what is being wasted; for example military and space expenses is a huge drain. We all know deep down it is not required.

We should be using the money to build and not destroy. Live in courage and not fear. Shift military industries and personnel and people not working into creation and caring functions not destruction and fear and violence based activities.

Posted 22 July 2011, 05:17 by David Cielak
Re: Economics 101: The CBO found cutting the payroll tax the most effective job creator per dollar of budget expenditure — see http://www.cbo.gov/ftpdocs/112xx/doc11255/Unemployment_Testimony.shtml. Payroll taxation now burdens employment much, much more heavily than the taxes’ designers ever intended, because we have become addicted to the revenue. Payroll tax has crept up from around 1% of federal revenue at inception to around 40% today. But the main reason why shifting the tax burden away from employment (payroll taxes) and towards “things” (non-labor inputs to business — energy, materials, land) would boost employment is because it would shift the relative prices of labor, now perversely taxed, vs. non-labor resources, now perversely subsidized. It could create a relative price shift of hiring people vs. consuming more stuff of around 30%. That’s a huge price signal that would stimulate labor demand and could ultimately create tens of millions of new jobs. Businesses’ bottom lines would not suffer if they heeded such a signal, and businesses generally don’t ignore big price signals. Right now they are heeding a distorted price signal in the opposite direction, discouraging hiring and promoting resource consumption, in order to bolster their bottom line amid a tax-distorted pricing environment. Correct the distortion, shift the perverse incentives against hiring and you shift the behavior — Pingouvian Economics 101. There’s a huge opportunity now with the WH and some Congressional leaders in both parties supporting extending the 2011 2% payroll tax cut (worth $110 bn) and possibly expanding it to employers, while there is also emerging agreement that we have to raise at least some more revenues to strike a debt ceiling deal. They would pay for extending the PRT cut and make it revenue neutral. Those additional revenues could be any combination of enactable levies, loophole closures or tax exenditure reductions, as long as they come from non-labor sources — e.g. reducing oil subsidies. Then we could have a significant start on an effective payroll tax shift that would be an efficient job creator. Let’s begin now.

Posted 21 July 2011, 11:30 by Stephen Kent
Increasing taxes on goods and simultaneously lowering payroll taxes would definitely lower the unemployment rate. When the price of a factor falls, the demand for it increases as long as the demand is at least somewhat elastic. Labor demand is elastic. The U.S. government should increase sales tax rates – primarily on goods that are deemed unnecessary for the people or harmful, such as high-cholesterol junk food, private jets and helicopters, very expensive gold jewelry, and very expensive cars. An ad hoc government commission should decide which sales taxes to increase.

Posted 21 July 2011, 00:15 by Rasa Petrauskaite
Agreed on job creation and sustainability. II may misread this but is the proposed increase in “material” not just a different form of value added tax?

The VAT, as proven in Europe, unfortunately leads to more not less government spending. In my opinion the solution, unfortunately is not a “revenue” shift but a fundamental shift in ideology by government that a balanced budget is an absolute must. We cannot just keep raising the debt ceiling. As difficult as it may sound military spending for example needs to be reduced.

Posted 20 July 2011, 17:01 by Marcus Edmonds
Excellent Idea. Multiple benefits (environmental as well as economic) through a shift in value. Easy to implement. There are always other consequences, unintended or not, but from a pure economic standpoint, the shifting of value seems very legitimate and well worth acting on. In theory, demand is unaffected as the net cost of production is unchanged and prices remain stable. Hopefully, if employment increases, demand should increase. The increased cost of raw materials is at the heart of Natural Capitalism (Amory Lovins/Rocky Mountain Institute) and will fuel our ongoing efforts towards sustainability. I would happily sign up for as large a shift as possible of taxation from employment to natural resources/raw goods.

Posted 20 July 2011, 09:24 by Joe Goebel
I have not read Economics 101 but I do not think that even that can justify author’s claims.

Putting higher taxes on energy or other materials(not sure what he means by this) will in turn increase the cost of these materials to industries and hence directly effect their bottom line,and reduce there capacity to hire more people.Energy prices are already peaking and I am definetly sure that taxing them will lead to inflation something everyone is trying to avoid at this moment.

I would however request the author’s clarification on how he proposes to tax these
items any detail in this regard will make the
article more usable.

Posted 20 July 2011, 09:02 by karan razdan
Of all the ideas featured, I like this the most. It works through providing incentives to hire (making hiring cheaper).

However, I wonder what happens to productivity as we hire more workers. Also, I presume the assumption is that with hiring more labour we would see growth that offsets the tax on “things”; hence the claim that this tax shift would pick no winners or losers. Is that true?

Posted 20 July 2011, 06:16 by Zaki Zahran
I cannot understand why increasing the “things” taxes can help unemployment decrease and add his effect to the decrease of payroll tax itself.

Posted 19 July 2011, 11:17 by marta sanjurjo