10.06.2009 Policy Points

Creating Jobs by Aiding States

Last week’s alarming national employment report has caused federal leaders to consider additional measures to spark job creation. Options reportedly under discussion include extending unemployment insurance benefits, providing tax credits to business that add positions, allowing businesses to carry back operating losses over a longer time period, and expanding and extending a tax credit for first-time homebuyers.

Unfortunately, none of these measures actually will have much of an impact on job creation and with the crucial excpetion of extending unemployment insurance benefits, none will do much to stimulate the economy.

Consider the first-time homebuyers tax credit, which some advocates want to extend and expand. In its current form, the tax credit is not only expensive and  inefficient, but it also does nothing to reduce the the nation’ supply of excess housing units. Calculated Risk explains:

The so-called “first-time” homebuyer tax credit just moves people from renting to owning, and doesn’t reduce the overall number of excess housing units. As I’ve noted before, the tax credit policy will push the rental vacancy rate above 11% soon ….

The new home market is definitely in a depression, and will not recover until the excess housing inventory is reduced. However most of the tax credit was aimed at the existing home market – and existing home sales are at about a normal level (not depressed), although the mix is skewed toward the lower end and distressed sales (not a healthy market).


Similarly, a proposed $3,000 tax credit for firms that hire workers also would have little impact. Dean Baker explains:

Most studies show that labor demand is highly inelastic (this is why increases in the minimum wage have little effect on employment), so a tax credit that modestly decreases the cost of labor is unlikely to have much effect on employment. On the other hand, there would be many opportunities for employers to game this tax credit.

The most obvious is simply bringing some jobs on payroll that are currently contracted out. For example, if a company currently contracts out its custodial services it can instead hire people on its payroll to do this work and get the $3,000 tax credit. This would lead to no net gain in jobs.

This is not to say that federal efforts can’t foster job creation; they can. However, instead of relying upon inefficient tax credits, policymakers should employ measures that directly put cash into the hands of individuals, such as unemployment insurance expansions, and help states avoid having to slash spending. Explains The Wall Street Journal:

Every House and Senate member, regardless of party, comes from a state having serious problems making ends meet in this recession. And getting money out to states quickly may have been the single most effective impact of the February stimulus package. That money — which went for construction projects, education and health-care programs — helped financially strapped states avoid even bigger disasters as they put together budgets for the current fiscal year ….

States generally are required to balance their budgets, so without stimulus funds they would have been forced into much deeper budget cuts this year. That would have had an immediate jobs impact as states laid off workers, signed fewer deals with private contractors and sent less money on to local governments to help pick up trash, keep parks open and put cops on the street.

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