Why Washington's Job Plans Miss the Real Point

America needs jobs. So far in the Great Recession, 8.4 million Americans have lost their jobs, and the official unemployment rate is 9.7% of the workforce (and counting the "discouraged workers," it's 16.5%). So, Washington is going to try to help create those needed jobs. A Senate proposal would give businesses a Social Security tax credit to hire the unemployed. And the White House wants to give businesses a $5,000 tax credit to hire new workers. Will either plan work?The Senate plan would exempt businesses from paying a 6.2% Social Security tax in 2010 on newly hired workers who had been unemployed for at least 60 days. The Congressional Budget Office (CBO) estimates that this would cost taxpayers $10 billion and create between 80,000 and 180,000 jobs.

The White House wants to take a different approach. It would give a $5,000 tax credit for each new worker that employers hire, at a cost of $33 billion. Opponents of that idea suggest that businesses could exploit this program by closing down, firing all their workers and then rehiring them to get the credit. But according to ABC News, the White House proposal would exempt companies that tried such a stunt from receiving the tax credit. Politico reports that the CBO claims the White House proposal would create the biggest employment bang for the buck.

Coming Back to Life on Its Own?

Nobody knows how many jobs the jobs the bill would really create, but the guesses suggest that it won't make much of a dent in the millions of unemployed. Still, if you add $33 billion to a deficit that's already $1.56 trillion -- or 10.6% of GDP -- the increase is pretty small, raising it by 0.6% to 2.1%.

So why not try one of these plans -- even if it only works around the edges? Maybe we should. But is such a plan even necessary? The White House is now projecting that the recovering economy is poised to start producing 90,000 jobs a month (totaling almost 1.1 million in a year) on its own. And the administration boasts that its $787 billion stimulus package has saved or created 2 million jobs -- at a cost of only $86,000 per job (assuming that only $172 billion of that package has actually been spent).

Unfortunately these government programs don't get at the bigger problem -- that the U.S. economy is overly dependent on consumers borrowing and spending to buy stuff. This is creating a two-tier society: Wall Street bankers and corporate executives who get bigger pay packets every year, and the other 99% of Americans whose jobs -- if they have one -- are subject to outsourcing and pay that remains flat as household expenses rise.

Innovation Creates Real Growth

As I've posted, I believe that the country's best path out of these small-bore efforts to nudge small businesses to hire workers is to create an economy that depends on business investment in technology. That's what pushed growth forward in the 1980s -- with the advent of the PC -- and the 1990s, when companies retooled themselves to take advantage of the Internet.

Sadly, the The New York Times reports that Silicon Valley -- which was responsible for so much of that innovation -- has fallen on hard times. It has lost 90,000 jobs between the second quarter of 2008 to the second quarter of 2009. Financing of start-ups tumbled 37% from 2008 to 2009. And vacancies in the region's commercial real estate spiked up 33%. Silicon Valley is hoping that green technology, in which its patents rose 7% between 2008 and 2009, will be the next big thing.

Let's hope so, because in the absence of such innovation-led growth, America will be locked into an endless loop of borrowing more money to make up the difference between what American workers want and what their incomes -- or lack thereof -- make it possible for them to buy.

A Simple Calculus for Businesses

Meanwhile, small businesses will hire more workers only if they conclude that the failure to hire those workers will cause them more in lost profits than the long-term cost of hiring those workers.

If Washington really wants to create jobs, it should come up with a way to boost innovation-led growth rather than tinkering around the edges of the tax code.
Read Full Story

Sign up for Breaking News by AOL to get the latest breaking news alerts and updates delivered straight to your inbox.

Subscribe to our other newsletters

Emails may offer personalized content or ads. Learn more. You may unsubscribe any time.