|
|
|
|
|
|
|
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
|
|
|
|
|
|
Saturday, October 17, 2009 :::
My brother won't be able to post this weekend, and suggested that I comment on Bruce Bartlett's opposition to a temporary payroll tax cut. I should really be studying for my economics test, but I'm sure I'll do better than Bartlett:Rising unemployment is fueling support, primarily among Republicans, for the idea of temporarily cutting the Social Security tax. While superficially attractive, this is actually a dreadful idea that will not stimulate employment at all and will just make Social Security's finances more precarious. I think it's most honest to treat the federal deficit as one large deficit rather than respect the separate account into which social security taxes are supposed to be kept. If the social security bucket goes empty, but there is money in the general fund, I think it's pretty safe to assume that social security benefits will be paid.The simple idea is this. The 15.3% payroll tax creates a wedge between what it costs a business to employ an average worker and the after-tax wage he or she receives. If the tax were cut, then theoretically businesses would be able to pay workers less without reducing their net wage. By reducing their labor costs, businesses will therefore hire more workers.
But what chance is there that workers will permit employers to reap the benefits of a lower payroll tax rate? In my opinion, none. Workers will insist that they get all the benefits in the form of higher take-home pay. Consequently, there will be no reduction in labor costs for employers and no reason why this measure will reduce unemployment. My short-term memory isn't... what was I just talking about? Oh, yeah. But I still find it remarkable that Bartlett managed to forget, between his first paragraph and his third, that unemployment is at 9.8% and rising. It's not the sort of environment in which "[w]orkers... insist that they get all the benefits in the form of higher take-home pay," especially if we're talking about the workers in that 9.8% (or the "discouraged" workers not counted in the unemployment rate).
One might even note that "it's clear from looking at labor markets that the problem for employers isn't that labor costs are rising excessively," which is how Bartlett's fourth paragraph begins. No, the problem is not that the market-clearing price for labor has gone up, the problem is that the market-clearing price for labor has gone down. For psychological reasons (and perhaps signalling reasons as well), it's hard to cut nominal wages when the market-clearing price goes down, which is why the market isn't clearing. The beauty of a payroll tax cut is that from the employer's point of view, wages would be dropping, but the psychological and signalling effects wouldn't be there.
He keeps going — I actually just realized how long it is, and I'm not inclined to respond to each paragraph in turn. He doesn't appear to add much aside from more mental accounting errors. If you're inclined to poke through for the laugh lines, be sure not to miss his assertion that the payroll tax is just like a 401(k) contribution — maybe he lives in an alternative universe in which the Bush social security reforms passed, or assumes a cut in the payroll tax would be coupled with a benefits reduction (I assume it wouldn't).
He does argue against temporary demand-side stimulus as ineffective; I don't think the demand side holds the best arguments for a payroll tax cut, but I do think a demand-side stimulus is better arranged as a broad-based tax cut — spreading a bunch of cash around generally, which people can spend on things that they want, produced by industries that produce things people want (which should be especially encouraged to produce and hire hire), especially things whose prices are depressed by the economic environment — than as a spending increase in the form of politically-determined projects in politically-convenient industries in politically-connected areas.
Anyway, I should study or sleep; any remaining fish in that barrel will have to wait for my brother.
::: posted by Steven at 11:22 PM
|
|
|
|
