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What Is Needed to Spur Job Creation?

What is the most effective step Washington can take to spur job creation?

Karen Dynan

Vice president and co-director of the economic studies program at the Brookings Institution

To spur job creation, we either need to increase consumer and business spending, which will spill over into higher labor demand, or to lower the cost to firms of paying workers. Last year’s stimulus plan worked primarily through the first of these channels, but current discussion is focused on the second because it is thought to be more cost effective. Cost effectiveness is a priority given that federal debt is on an unsustainable long-run trajectory even in the absence of a large new stimulus package. Simplicity is another priority, as complicated rules would limit take-up, especially among smaller firms that do not have extensive accounting or legal expertise — indeed, an overly complex new jobs tax credit program implemented in the late 1970s saw only about 2 percent of eligible small firms participate.

I favor reducing payroll taxes for firms that increase their total wage bill. The design of the policy need not be complicated. For example, firms could receive a credit based on the increase in the wages on which their payments to the social security and Medicare programs are calculated. Because businesses are already reporting these wages on a quarterly basis, the administrative costs would be low and the benefits could be reaped fairly quickly.

To be sure, such a measure has limitations as a way of inducing job creation. For example, firms will receive credit for raising wages or converting workers from part-time to full-time in lieu of creating new jobs. However, these actions would also help workers and thus be broadly stimulative for the economy. Critics also argue that firms will benefit from hiring workers that they would have hired anyway. But, the cost effectiveness of the measure would not be nearly as diluted as a broader payroll tax reduction that applied to all existing workers.

Bret Park

Owner of ParkCo Architects in Fayetteville, Ark., with three employees

In my personal experience, Washington should find some way to spur lending on the small scale. My wife and I are architects, partners in our own firm, and we specialize in small commercial, religious, and residential projects. We have a particular fondness for small residential projects, addition/remodel and new houses. Our clients are highly motivated and their plans are not speculative. They want to live in their homes for years. They tend to have solid equity in their existing homes or they have assets to secure the financing of their new homes.

Despite this, banks aren’t cooperating with these clients. We are finding that they are unable to justify loans for these projects because they’re using deeply depreciated properties as comparable appraisals. This extremely conservative approach may be understandable in the case of speculative residential development, but not in the case of our work. These clients represent very good risk for a cooperative lender.

We are also seeing an unwillingness for banks to work with our small business owner clients. They are having a very hard time securing operating capital for their businesses. This includes construction-related businesses and others. The combination of these forces is going to have a negative effect on our local employment picture. There are many construction-related employees that will become unemployed as well as others that aren’t specifically related to construction. For example, I know that local lumber yards are beginning to lay-off employees.

I don’t know enough about the interface of legislation and banking to suggest a specific means to facilitate increased lending. However, I know that businesses and construction rely on credit to continue to function. Make money available to create and maintain jobs.

Alan Viard

Resident scholar at the American Enterprise Institute

Under normal economic conditions, Washington should not manipulate taxes and spending based on short-run job creation. Instead, it should maintain fiscal balance and low marginal tax rates to promote long-run growth. The Keynesian function of boosting demand during downturns and restraining it during upturns should normally be left to the automatic fiscal stabilizers and the Federal Reserve.

Of course, recent conditions have been anything but normal, as an unusually severe recession has left 15 million people jobless and the Fed has been handcuffed by its inability to reduce interest rates below zero. Congress adopted stimulus packages in February 2008 and February 2009 to boost demand and there are now calls for a third stimulus.

The economic boost from another stimulus is likely to be limited, particularly if the Fed responds by moving interest rates back above zero more quickly than it otherwise would. Although the pace of upcoming job gains will be slow, the government can’t do very much to accelerate it. But, it can provide a much-needed safety net by extending emergency unemployment benefits.

If we adopt a third stimulus, it should focus on incentives to speed up economic activity. Extending bonus depreciation for equipment investment could do some good, at little revenue cost. A tax break for new hiring, which has support in both parties, could also help. The tax break should not be restricted to small firms, as big firms are equally effective in creating jobs. To avoid issuing more debt, the third stimulus should be financed by recapturing infrastructure money not yet spent from the second stimulus.

Steve and Jan Gaswint

President and vice president of Black Run Transmission, a heavy- and medium-duty truck repair shop in Nashport, OH., with five employees

It is a very well-known fact that small businesses create two-thirds of all new jobs. Right now, we small business owners all have our feet firmly on the brake when it comes to hiring. The fact is we are forced to take a wait-and-see attitude before expanding or hiring new employees because we just don’t know what sort of mandates, regulations or tax increases are going to come down from on high.

We can’t hire new people or make investments in new equipment while there’s a very real possibility that our energy prices could triple or our health care premiums could skyrocket as a result of federal legislation. Making new investments in employees and equipment are effected by government intrusion. All of the mandates and programs the government creates cost money. Too many times they turn to us, small business owners, to fund them. Simply put, for me to create more jobs I need two things: more orders from more customers and fewer mandates and potential mandates from the government that eat up our capital.

Ken Gough

President of Accurate Machine Products Corporation in Johnson City, Tenn., with 25 employees

The best thing that Washington can do to help create jobs is…nothing. I don’t mean letting the status quo continue –- that would be stupid and intolerable — but by removing the Washington-imposed impediments that prevent businesspeople like me from realizing our dreams. We want to grow our businesses and provide jobs, and bureaucrats are not needed to make that happen. Washington only has to get out of our way, and we will do it! Yes, that’s a cliche, but it has become one because it is the truth.

Reasonable people on both sides must now work together to find changes that are acceptable because (1) a great number of changes are desperately needed and (2) business can deal with anything except uncertainty. The economy will remain in a dead calm until business and consumers can be certain of where we are headed. The sooner we see real results, the better. Thus, small, doable bills on which we can agree are better than attempts at huge systemic changes.

Most importantly, and as rapidly as possible, we must resolve to live within our means. While this may not seem to be a way to create jobs now, who would want to invest wealth now in a nation that seems hell-bent on economic suicide? And who would spend wealth now when it will be needed to survive when the collapse occurs? On the other hand, a clear and forceful acknowledgement from our leaders that “we get it,” accompanied by the painful actions that will be necessary to reverse our current disastrous course (even if at first they are little more than symbolic), will do more to restore confidence than anything else that Washington could do. And confidence is the key ingredient to an economic turnaround.

Timothy Bartik

Senior economist at the W.E. Upjohn Institute for Employment Research, an independent non-partisan research organization located in Kalamazoo, Mich.

I recommend two programs to spur job creation. The first recommendation is a tax credit to employers that create jobs. This tax credit would be an improved version of the New Jobs Tax Credit used in 1977-78. The second recommendation is a modernized WPA, in which non-profits and small businesses would be provided funds to employ the long-term unemployed. This modernized WPA would be modeled after a program called MEED, used by the state of Minnesota from 1983 to 1989.

Both these programs could create millions of jobs and be cost-effective. Based on our past experience, I have estimated that either program would create jobs at a gross cost of about $30,000 per job. This cost is less than one-third of the average cost per job created of the fiscal stimulus passed in early 2009. Targeting job creation is more cost-effective than just boosting aggregate demand.

Employer tax credits for job creation have been proposed by President Obama, Congressman Etheridge, Senator Feingold, and Senator Casey. A national version of MEED has been proposed by Senator Franken. However, to be timely in solving our current unemployment crisis, we must enact a unified version of these proposals as soon as possible. Furthermore, we must devote enough resources to these job creation programs to create at least several million jobs in 2010.

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