MAKING SENSE -- April 25, 2012 at 1:50 PM ET
Do We Need Government Intervention to Create More Jobs?
Civilian Conservation Corps workers in 1933 construct a road. Public domain photograph from the Franklin D. Roosevelt Library and Museum via Wikimedia Commons.
Paul Solman frequently answers questions from the NewsHour audience on business and economic news on his Making Sen$e page. Here is Wednesday's query:
Name: Edward Nims
Question: Does supply-side theory still have any relevance in a modern, service-based, demand economy like ours? Could a capital gains tax holiday actually work to create immediate jobs, or does this situation call for more federal intervention (i.e. infrastructure works projects?)
Paul Solman: Supply-side theory retains some relevance, sure. Its basic premise is that high taxes discourage investment. Without investment, producers won't become more efficient, won't be able to increase the supply of what they produce. Therefore, goes the argument, if you raise taxes high enough, you'll eventually discourage enough investment to drive both output (supply) and jobs lower than they could be otherwise. So sure, at some point, you might drive taxes too high to discourage investment. But are we anywhere near that point today? See our recent story with Nobel laureate Peter Diamond and Reuters reporter David Cay Johnston, who both argue that they are not, as Diamond has in a recent paper with fellow economist Emmanuel Saez, a paper that they summarize in Monday's Wall Street Journal: High Tax Rates Won't Slow Growth.
Our TV story also featured the famed guru of the supply-side argument, Arthur Laffer, and his (or perhaps Arab medieval scholar Ibn Khaldun's) "Curve."
Could a capital gains tax holiday create some jobs short term? I suppose so. But whenever I've actually researched this issue by interviewing businesspeople, from the CEO of Harley Davidson nearly a decade ago to the Nashville business community and the CEO of Yazoo Brewing this past December, the most common response has been that tax rates don't much influence hiring.
So if you want more jobs -- and with U-7 still up around 27 million, who doesn't? -- federal intervention may be a better bet. Something along the lines of the Roosevelt administration's CCC -- the Civilian Conservation Corps, say. Or my own only half-facetious pet project: the MMM -- Mass Massage Mobilization. I'll leave the elaboration for another day, another post.