4
Could tax credits help create jobs?
Greg Mankiw
To view this content, Javascript must be enabled and Adobe Flash Player must be installed.
TEXT OF INTERVIEW
Kai Ryssdal: There are a whole lot of moving parts as the Obama administration tries, OK, keeps on trying to get the economy going. And while some economic indicators are promising, there's a big one that's most definitely not. Employment. We're down more than eight million jobs since the recession started. That helps explain the trial balloon that's being floated in the news today. Giving companies tax credits if they create new jobs and hire people to fill 'em. To help explain how that might work, if it might, we've called Harvard University economist Greg Mankiw. Good to have you with us.
GREG MANKIW: Nice to be with you.
Ryssdal: This idea of tax credits to get companies hiring again obviously is in the press today. What else might work if the government wanted to try to convince companies to do something?
MANKIW: Well, there's been a variety of ideas on the table. A variety of economists, including myself, have been talking about a payroll tax cut as part of the stimulus package. I was proposing that six months ago when the original stimulus package was put in place.
Ryssdal: Payroll tax cut would be unemployment, Social Security, those kinds of things.
MANKIW: Yeah, every worker pays a payroll tax that's earmarked for Social Security and Medicare, and we could certainly cut that task and use other sources of revenue for those programs. The idea would be that it would provide an incentive for firms to hire because the cost of labor would be lower.
Ryssdal: What about just direct aid to states? The federal government gives the states money, and then the states spend it to get companies hiring again.
MANKIW: Well, they've done some of that. And that probably makes some sense. Probably it depends on one's view of the relationship between the federal government, the state government, just like every household has to deal with its own finances, at some level each state has to deal with its own finances and can't always turn to the higher level of government to deal with their problems.
Ryssdal: There is something about this discussion of tax credits, and the government getting companies to hire that actually stumps me. Aren't we still asking companies, even if we give them tax credits, or direct aid, aren't we asking them to hire in an economy where consumer demand is still weak, where businesses are unsure of the demand for their products, and is this going to be any incentive?
MANKIW: Yes, you're absolutely right. And you have to think about both supply and demand. And firms certainly in thinking about having labor to hire, and how much to produce, are thinking about whether they're going to have customers to buy that. And a large part of what the macro policy has been doing has been trying to prop up the aggregate demand for goods and services. That's certainly been the purpose of the stimulus package, and that's certainly what the monetary authority is trying to do, and what the Fed is trying to do by keeping interest rates so low, by buying mortgage-backed securities. They're trying to make loans more readily available in order to get aggregate demand up, so those customers will be coming in the door and firms will have a reason to hire.
Ryssdal: So if you run, let's say, a concrete company, and there's nobody buying your concrete to build buildings, is there an amount of money the government could give you that's going to make you hire?
MANKIW: Well, to me the curve slopes downward, and that means when things are cheaper, people buy more of them. And that includes companies. So when the cost of labor is less, people will hire more workers. And I think one of the ideas of trying to reduce the cost of labor through something like a payroll tax cut is in order to incentivize firms to hire more. But that will also put money in the pockets of corporations, and money in the pockets of workers, and that will give them resources to spend. So I think that's one of the reasons why economists have been looking at a payroll tax cut as one possible tool to use in terms of getting the economy going again.
Ryssdal: Is it an achievable goal? Can we create enough new jobs to get this economy where it needs to be by tax credits, and payroll tax cuts?
MANKIW: I think we can help. The big question is what does the aftermath of a financial crisis look like? The history of other financial crisis that economists have studied tend to suggest you don't get a rapid recovery. We have had deep recessions with rapid recoveries, the 82 recession is one example. Most economists don't look at that as a model for this recovery, and so unemployment is going to be high for a while.
Ryssdal: On that topic of economic recovery, there is still plus or minus a half-trillion dollars in stimulus package money that is not out there yet. What about the theory that says, listen we should just wait to see what happens with that before we start plowing new money in here.
MANKIW: Oh, I think that's probably right. It probably makes sense to just wait and see what effect it's going to have, let Ben Bernanke continue to do his job of trying to stimulate the economy, get financial markets going again, rather than thinking about a massive new stimulus package at this very moment.
Ryssdal: Greg Mankiw. He's a professor of economics at Harvard University. Professor, thanks a lot for your time.
MANKIW: Thank you.
About the author
Kai Ryssdal is the host and senior editor of Marketplace, public radio’s program on business and the economy. Follow Kai on Twitter @kairyssdal.
I agree with the liquidity trap concept. I don't care how much you reduced the cost of labor without equal demand all you are doing is funneling more money into the economy possibly creating a monetary inflation trap. The concept that supply creates its own demand is a fallacy. We live in a different environment than that of Adam Smith. The problem is more political than economic theory. Conservative economists will not condone government spending as a stimulus even if it works because of their ideologies. But the way I see it, when you have a lack of demand than the government needs to build "pyramids" to reduce unemployment and increase demand....the multiplier effect.
Good interview with good thoughts. Those who preach Keynes will stimulate demand are not familiar with most current economic research. The multiplier is about 0.6 for government spending, so for every $1 you take out of the private economy you get $0.60 of bang. Bad ROI! Tax cuts have a multiplier greater than 1. In fairness these multipliers are hard to measure accurately, so there is some uncertainty in them. Mankiw is essentially right that reducing labor taxes reduces the cost of labor. Price goes down, demand goes up. You have to remember that companies substitute capital equipment and overseas cheap labor for expensive US labor to meet the existing demand, no matter how paltry. If US labor becomes cheaper on a relative basis than capital equipment or overseas labor, the companies will consume more. This will stimulate more demand and so on. Also at some point in a recession, people just have to spend. Machines break, clothes wear out, .... You are back to the capital equipment-overseas labor-domestic labor question.
Ryssdal asked a great question. Unfortunately, Manikew dissembeld his answer.
If there is not adequate demand for products, who will take the first step in building production capacity by hiring more labor? Keynes described this as a liquidity trap, where there may be money in the system, but no one is investing or buying products. Like a junior high dance, no one wants to go on the dance floor first.
Keynes solves the trap by boosting demand. Manikew, due to his ideological proclivities, hates that idea so suggests a tax cut.
But more liquidity won't solve the liquidity trap problem any better than turning up the music at the junior high dance. Someone has to prime the pump - Keynes said government can do it.
The record is clear that government spending can prime the pump. The problem seems to be, after the junior high kids start to dance and party gets going, is "When do you then take away the punch bowl?"
