The recently reported jump in the October unemployment rate to 10.2 percent, a rise of .04 points in one month, has decisively signaled that the shape of the stimulus package enacted last February needs to be radically altered. Talk of additional stimulus is already bubbling up in Congress. Simultaneously, if nothing is done, the Bush tax cuts will expire at the end of next year. All in all, the current path of fiscal policy will impart a fiscal drag on the economy worth about 2 percentage points of GDP by the end of 2010, by which time the unemployment rate will probably have reached 11 percent. We need a better-designed stimulus, not more stimulus.

Talk of additional stimulus rightly awakens fears of higher interest rates, which will crowd out investment, push house prices down further, and harm highly indebted households. More federal spending on measures like homebuyer tax credits, green technology, and outright pork will boost federal borrowing and push up interest rates while actually discouraging employment growth, as we have seen.

Fortunately, there is a way to deal with the jobs problem without adding substantially to the budget deficit. The balance of the fiscal stimulus package, about $500 billion worth, should be immediately rescinded and replaced with a one-year payroll-tax holiday. At the same time, the marginal-tax-rate cuts, due to expire next year, should be made permanent.

For those who haven’t noticed, the worst news of the sharp rise in the unemployment rate came from the household survey. That survey contained evidence that small and new businesses, the sectors responsible for most growth and job creation, are suffering most heavily during this recession. Why, with that reality squarely facing it, would Congress and the president — on the very day the devastating unemployment report was release — provide another $10 billion to $15 billion of home-buyer tax credits? By most analyses, the credits have done very little to stimulate home sales — let alone job growth — but rather have lined the pockets of brokers and homebuilders. The course of stimulus needs to change toward a more tax-neutral approach that favors all households and all businesses, not just those with lobbying clout in Congress.

A one-year payroll-tax holiday provides two substantial benefits that will help the economy return to growth. First, it puts about $325 billion back into the pockets of all American workers for them to use as they see fit to deal with the stresses tied to the lengthy recession. Second and even more important, it provides relief from the employer portion of the payroll tax, about $325 billion per year, which is a tax on employing labor. For employers contemplating further layoffs, payroll-tax relief will provide an additional incentive to keep workers on the payroll while reducing the cost of extra production.

In short, payroll-tax relief provides an increase in aggregate demand by putting more cash into the pockets of American workers while boosting available supplies of goods and services at a lower price by reducing a major cost of production for producers. Last time I looked, an outward shift in aggregate demand and aggregate supply was consistent with more output at constant prices, just what we need at this point.

The payroll-tax-relief measure is, of course, adjustable. It can be scaled to a lower or higher level by enacting provisions for shorter/longer periods of relief. The important point is to enact substantial (at least $500 billion), sustained, and predictable payroll-tax relief to enhance the benign outward shifts of aggregate supply and demand that will result from the tax cuts for households and employers.

Opponents of the payroll-tax holiday will claim that they jeopardize Social Security and Medicare benefits because payroll taxes are “earmarked” to pay for those programs. That charge is false. Tax revenues are totally fungible. Cancellation of the balance of the existing stimulus package provides most of the funds necessary to pay Medicare and Social Security benefits, which, in any case, are not contingent on payroll-tax receipts.

By now it should be painfully evident that the existing stimulus package was poorly designed, especially when it came to boosting employment. At the time it was passed, administration economists promised that it would cap the unemployment rate at 8 percent. The report of an October unemployment rate of 10.2 percent suggests both that this promise was fanciful and that the stimulus program is not working. Having reached a point where monetary policy and fiscal policy have both been pushed very hard, having had their peak effect in the third quarter while accounting for about 4 percent of the 3.5 percent growth achieved, the need is clear for a new battle plan that actually boosts growth, investment, and employment.

Congress and the President should stop wasting their time pushing a health-care plan that even a Democratic Congress can’t embrace and concentrate on enacting a stimulus package that could help get the economy growing again and reduce unemployment. Further, by committing in advance to eliminating the marginal-tax-rate increases scheduled for next year, Congress could remove an incentive-dampening drag on growth that is currently looming over small businesses.

As the newly fashionable John Maynard Keynes once said, when responding to criticism for having shifted his position on a policy measure: “When the facts change, madame, I change my mind. What do you do?”

Dear Mr. Obama, what do you do?

+ A A -
Share via
Copy link