Dec 22, 2010

Would cutting the employers' payroll tax create jobs?

On Monday night I was lucky enough to get to see Rachel Maddow's show live. She interviewed Nouriel Roubini, the economist who got famous for predicting the 2008 real estate crash before almost anybody else. She asked him what he would do to spur the economy if politics didn't matter - if he was "economic dictator for a day." The first thing he said was that he would enact a temporary payroll tax holiday not just for employees, which was part of the tax package that passed last week, but also for employers.

A bit of background: in today's system, employers and employees split the cost of the tax on wages that goes towards Social Security and Medicare. Part of the Obama tax package that just passed was a one-year payroll tax holiday on the portion of the tax that employees pay. Employers will continue to pay the same amount they've been paying, though. Roubini's argument was that if employers also got a tax cut, they would save 6% of their wage costs and be able to hire more workers.

Here's the interview, with the part I'm discussing at 3:10:

Now, I really have no right to challenge Roubini's economics, given that he's a renowned professor and I've taken exactly one economics class in my life (and even that one was half history). But I'm going to do it anyway. We keep hearing that companies are sitting on enormous cash reserves but are still not hiring. That is, they have the money to hire people, or to buy new equipment, or generally to invest in their businesses, but instead that money is sitting under the proverbial mattress or, in a best-case scenario, in some kind of savings or investment account. As Washington Post cartoonist Tom Toles brilliantly put it on Monday:

So I don't see why enabling employers to save even more money would get them to start hiring people, since clearly the issue is not that they don't have the cash. We need some other kind of stimulus to get people hiring - probably by boosting purchasing power among ordinary Americans, which is why cutting the employees' side of the payroll tax is a much better idea (although it may pose a long-term threat to the viability of Social Security). Even better would be to continue to invest in state and local governments so they can stop laying people off and cutting services, but that's a larger issue for another day (or post).

1 comment:

  1. I thought this was a historical blog! You're such a polymath! Love it.