Job-Creation Policy

Alan Blinder on the relative merits of a new-jobs tax credit:

Getting the biggest bang for job-creation bucks, by Alan S. Blinder, Commentary, Washington Post: ...Broadly speaking, job-creating policies come in two varieties: general stimulus to boost growth and programs targeted specifically at job creation.

The first category follows the "build it and they will come" strategy: If you raise GDP, you will get more jobs. That's true. And it's the basic idea behind the Recovery and Reinvestment Act and countless other monetary and fiscal stimulus programs...

But there's a catch: That strategy is expensive -- ... it takes about $93,000 worth of garden-variety fiscal stimulus to create an average job.

The search for a cheaper way leads to policies specifically targeted at job creation. The two main options are direct public-service employment and a new-jobs tax credit. The Obama administration and several members of Congress have proposed the latter. If most of the new public-service positions are low-wage jobs, and if the tax credit is designed well, the per-job costs of these policies are comparable: $30,000 to $40,000. I would recommend doing both, targeting roughly a million new jobs with each program, at a budgetary cost of perhaps $70 billion. While 2 million more jobs won't end America's gaping shortage, it would make a significant dent. ...

Apart from outright fraud, there are three major ways (and many minor ones) for firms to exaggerate the number of new jobs they've created in order to receive the tax credit.

One is to both fire and hire. That problem is easily fixed by awarding the tax credit only for net increases in head count above some base, such as last year's employment. A second gimmick is to replace full-time workers with part-time workers. That loophole can be plugged by offering the tax credit only to firms whose total payroll costs, not just head count, rise. ... But doing so renders the tax credit irrelevant to many firms that slashed employment during the recession and cannot return to their 2009 payroll levels quickly.

New firms pose a problem because they had no employees last year..., if we allow new firms to claim the credit, clever executives will create new firms... Congress was aware of this concern when we last instituted a new-jobs tax credit, in 1977. It decided then to "split the baby" by giving new firms half the tax credit.

All these possibilities for gaming tell us two things. First, the legislation must be drafted with care. Second, the agency that administers the new-jobs tax credit must be assiduous about enforcement. But given the jobs emergency and the impending budget calamity, that doesn't seem too much to ask.