Jens 'n' Frens
Idle thoughts of a relatively libertarian Republican in Cambridge, MA, and whomever he invites. Mostly political.

"A strong conviction that something must be done is the parent of many bad measures."
  -- Daniel Webster

Sunday, October 18, 2009 :::

I'd like to thank my brother for hitting some of the first ginormous flaws in this pathetic piece of attempted economics by Bruce Bartlett. I think it would help to note, incidentally, that most of the proposals I've heard have involved cutting the employer's portion of the payroll tax, such that sticky wages would lower the cost to employers of keeping workers on the payroll. That understood, continuing with the "highlights":
Second, the payroll tax cut would only put money in the pockets of those who already have jobs. But the people most in need of help and most likely to spend a temporary increase in their income are the unemployed. They will get nothing from this proposal.
As my brother noted, the fiscal-stimulus side of this isn't its strongest point, and, as my brother noted, any fiscal stimulus role this does play would not be from workers spending the extra money, but from companies spending it — improving their balance sheets or passing the money on to investors, but possibly also by not disinvesting, or even by investing more. The important factor isn't the extra bit of cash that the companies get, but the effect to employers on the marginal cost of labor.

The conclusion, that people without jobs get nothing from this proposal, is wrong. What the people who don't already have jobs would get from this proposal is jobs. The same goes for the people who have jobs now, but whose employers are considering cutting them, not because the cost of employing them has gone up, but because the private benefit to employing them has gone down.

As for short attention span, what I found most comical on that front was
Third, much of the payroll tax cut will accrue to those with high incomes since there isn't any practical way of limiting the payroll cut just to those with low incomes.


It's really the best tax the federal government has--it's broad-based, has a single low rate, exempts income from capital and doesn't apply to wages above $106,800 (except for the 1.45% Medicare tax).
There you go, folks; cutting the employer's contribution to social security, as noted in the last paragraph, provides employers an incentive (relative to current conditions) to increase employment and especially to create high-paying jobs — but only up to six figures. It's not so much the case that there "isn't any practical way of limiting the payroll cut to those with low incomes" — there's no practical way not to.

In a World Bank paper, economists Peter Orszag, now director of the Office of Management and Budget, and Joseph Stiglitz, winner of the Nobel Prize in economics, said it is wrong to infer that a mandatory savings program such as Social Security "necessarily reduces labor supply."
Indeed, if one is dealing with rational agents in a flexible economy who observe an increase in their current taxes (on marginal work) and an exactly offsetting (in present value terms) increase in retirement benefits (from doing that work), this should in fact have no affect on labor supply. The two glaring flaws in this point are
  • The proposal is not to lower taxes and benefits on workers, but to lower taxes now, when wage stickiness and certain macroeconomic multipliers are likely to lead to private benefits to employment lower than its shadow value, and to make up the funds in some fashion (pick one) when that's not the case, and
  • Labor supply isn't the problem right now (much as Casey Mulligan might disagree).

Most of the second half, as long-winded as it is, falls apart to this. He goes on and on and on, imagining that there's a real barrier between general revenues and the social security system — does anyone who watches politics have any doubt what happens if the "trust fund" runs out and social security is only taking in 65% of what it's paying out? — and that there's a strong, Ricardian-equivalence-type link between tax wedges between labor supply and demand now and benefits to labor down the road that is effective even in the short-run with a labor market in disequilibrium.

But my brother and I frankly have wasted too much time — and it's my fault; sorry, Steve — even reading past the third paragraph. The notion that employees right now are in a position to demand that employers hand over any tax cut on employment costs should have saved me from spending more than 15 seconds even looking at this article.

::: posted by dWj at 11:43 PM

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Idle thoughts of a relatively libertarian Republican in Cambridge, MA, and whomever he invites. Mostly political.

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