Two Thoughts on the Stimulus

From disparate directions of the economic debate come two thoughts on President Obama's proposed stimulus package. I thought this might be a useful follow-up to what I posted last Friday ("Short Term Gain, Long Term Pain").

First, veteran journalist Martin Walker, who now holds the title "editor emeritus" at United Press International, writes:

The stimulus plan that emerged from Speaker Nancy Pelosi and the House, without a single Republican vote in support, is not impressive, whether judged by its ability to create jobs or to invest money widely for the economy of the future. It does not even do a competent job of providing a quick fix for a consumaholic system that finds itself suddenly starved of cash.

The Senate compromise, which is expected to pass this week, is not much better. The largest single item remains the extension of Medicaid, which will be helpful for the surging numbers of unemployed but will not create many new jobs. Those it does create will be in the already swollen health sector. This is now set to consume 17 percent of GDP while producing worse life expectancy and infant mortality figures than other countries enjoy while spending less than 10 percent of GDP.

Second, from economist Arnold Kling, a member of the Mercatus Center's Financial Markets Working Group, writing in a "Tax & Budget Bulletin" for the Cato Institute:

The key to averting ... a depression, is to restore business profitability, especially in the nonfinancial sector. In a capitalist system, profits and losses are signals. Profits signal businesses to expand, and losses are a signal to contract. Profits have been collapsing, resulting in firms laying off workers and pursuing few new investments.

The Bureau of Economic Analysis reports that total wage and salary disbursements grew 2.8 percent in 2008 over 2007.3 Meanwhile, corporate profits were down 9 percent through the third quarter of 2008.4 Fourth quarter data were not available as of this writing, but Bureau of Labor Statistics data for the fourth quarter show that labor costs rose faster than productivity at a 12-percent annual rate, which implies a further plunge in profits.

The government can help restore profitability in the private sector by reducing business taxes. Cutting the payroll tax rate on employers would be particularly helpful. A 50-percent cut in this tax would amount to about a $230 billion annual savings. Such a cut would increase the deficit by much less than the current stimulus bill, while likely producing a larger boost to employment. In addition to helping restore profitability, it would reduce the cost of labor at the margin, giving businesses an incentive to hire workers. Also, it would take effect more quickly than the spending in the current stimulus bill.

There you have it -- cutting the payroll tax will have a greater measurable effect on creating employment than the Obama-Pelosi "stimulus" package. Why isn't Congress talking about doing what is effective rather than what feels good?

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