Obama Considers New Job Tax Credit

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Meanwhile, President Obama is adding more gin to the party punch. He says he’s considering ways to create more jobs without a new stimulus program. Among the schemes under consideration is a $3,000 new job tax credit.

Hey, why not! They had such great success with the Clunker tax credit…and with the first time house buyer tax credit. Of course, when you pay people to do things, you can’t be too surprised that they do them. And then, you can’t be too surprised when they stop doing them after you stop paying them. Thus, when the Clunkers program conked out in August car buyers stopped buying. And when the new house purchase tax credit expires in November, don’t be surprised if house sales collapse too. So, if the feds are going to pay people to hire other people, they better be prepared to do it for a long time.

Which brings us back to our calculations. How long will it be before this economy can walk without the feds clutching both arms? A few months ago, we wondered how long it would take consumers to put their finances back in order. Five years? Ten years? There are so many assumptions required that the numbers barely make sense. Still, if you think the total debt burden is headed back to under 200% of GDP, where it was for most of the last century, that would require the elimination of debt equal to about 160% of GDP…or more than $20 trillion worth. How do you eliminate debt? Well, some of it simply disappears…through defaults, foreclosures and bankruptcies. The rest is paid off. How? By saving. Now, imagine that the United States could put an amount equal to 15% of GDP to work paying down its debts. That’s savings and capital formation of all types – corporate as well as individual. It ignores government, which is going in the other direction. At 15% of GDP per year, paying America’s private debt down to under 2 times annual output is still about a 7-year project.

So, prepare for a long dry spell. In the best of cases, the American public has to stay on the frugality wagon for 7 to 13 years.

And in the worst of cases? Oh, well…that’s a different matter. The aforementioned US government is desperate to short-circuit the process of balance sheet repair. It is propping up the old tree every way it can. Thus, the whole period of adjustment may take much, much longer than it should. Instead of coming down with a crash, the limbs fall off one at a time. At this rate, the whole process could take nearly forever.

As the private sector eliminates debt, for example, the feds add it. The deficits are scheduled – by the Congressional Budget Office – to be monstrous, but controllable. Cash for clunkers, cash for houses, cash for jobs – it adds up. But the CBO projections are based on very optimistic assumptions, in which the economy ‘recovers’ quickly and grows strongly. They do not take into account the real nature of the slump. It is not a pause…it is a permanent change. The Obama administration cannot, ultimately, prevent change. But it can slow down the process so much that the depression begins to seem eternal.

Until tomorrow,

Bill Bonner
for The Daily Reckoning Australia

Bill Bonner

Bill Bonner

Best-selling investment author Bill Bonner is the founder and president of Agora Publishing, one of the world's most successful consumer newsletter companies. Owner of both Fleet Street Publications and MoneyWeek magazine in the UK, he is also author of the free daily e-mail The Daily Reckoning.
Bill Bonner

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Comments

  1. An employment tax credit is a credit for production and income, not debt-financed consumption (cf. cash for clunkers). Hence it induces an expansion of the tax base. Thus an employment tax credit can PAY FOR ITSELF in both the short term and the long term, and doesn’t need to be temporary. See http://www.onlineopinion.com.au/view.asp?article=8685 .

    Reply
  2. “it is not a pause…it is a permanent change”

    I’m not so sure about that.

    The stupidity and greed of humans never ceases to amaze me.

    Reply
  3. Gavin,
    you are correct.
    3k up front to have someone get a 30k job pays for itself easily.

    Taxes will be recovered of more than that from the employee.
    Then there are additional indirect taxes recovered from the consumption of the employee.
    Their consumption may also creat another job.

    The issue really is…

    will anyone take on new staff committments for a paltry sum of 3k?

    There still has to be a demand for goods and services to generate employment. Then you might ask.. if the demand is coming.. would the company have employed someone anyway and hence the 3k is wasted?… or is it wasted if the employer was always going to hire someone but because of the credit brings forward the recruitment by 6 months.

    Who knows for sure. I doubt the government does.

    Reply
  4. “prozak” wrote: “There still has to be a demand for goods and services to generate employment.”

    Granted. But that demand depends on employment, job security and the perception of job security. So even from the employers’ viewpoint, there’s a strong multiplier effect attached to that “paltry sum”.

    Reply

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