Another Stupid Political Class Economic Idea

The good thing about writing this blog is that you really never run out of materials. The political class continually astounds with stupid, ineffective, and usually excessively expensive programs and projects.

The latest example is a proposal from the Obama administration, as reported in an AP article on January 26, 2010, that would provide a tax credit to small businesses who hire new workers. The idea is to use the small business market as a job generation vehicle to reduce the politically distasteful levels of 10% unemployment. There are a few problems with this plan:

• How would the government distinguish truly incremental hires vs. hires that would have happened anyway? This is similar to the Cash For Clunkers disaster. People received thousands of dollars in government credits to buy cars they would have bought anyway. There was no incremental sales of autos under the program since the sales levels fell dramatically once the program was over, all the Clunkers program did was shift demand, not increase demand. The same problem would happen here, all jobs would receive the credit even if they would have happened anyway.
• How long would a new employee have to be on the payroll? What would stop a company from hiring people for just a short time and then firing them so that the temporary incremental wage expense would be less than the tax credit reward? How would the Federal government ever be able to track this situation for the thousands of companies across the country? Remember, this is the same government that could not track a single Nigerian would-be terrorist even though they knew he was coming, what day he was coming, where he was coming from, and his father had notified the government of the danger his son posed.
• How many hours would a new employee have to work a week to qualify for the credit. Could a company hire ten people and work them four hours a week and get credit for ten people when they could have hired just one person who worked forty hours a week?
• Given that the political class can do nothing efficiently or effectively, how would they police this national program to guard against abuse? What would keep a small business owner from fraudulently hiring friends and family members, who never do any work, just to scam the program for the credits?
• What would stop a company from firing its staff on Friday and rehiring them on Monday in order to get the credits? Remember, some of the Cash For Clunkers sales were for Hummers that should not have been part of the program. Just saying a company could not fire on Friday and hire on Monday does not mean they would not do it.
• It is doubtful firms hire people even though they do not have enough demand for their products and services? Doesn't it make sense that companies would have already hired people if they needed them for their business?
• According to the article, a similar program was enacted in the 1970s and very few businesses took advantage.

So lets review: the program would likely be subjected to a high degree of fraud, it would be impossible to distinguish truly incremental job formation vs. job formation that would have happened anyway, it will contribute to the skyrocketing federal deficit, it is unlikely to work if a company does not have the sales and revenue to support it, and similar programs have not worked in the past. Sounds like a winner to me. There is no way that this program would be effective, efficient, and workable and trackable.

Not to be outdone, several Congressional members of the political class have proposed similar programs. One of the those programs would exempt businesses from having to pay Social Security taxes for new hires for the rest of 2010. Okay, this would contribute to the hastening bankruptcy of Social Security and would face all of the problems discussed above with the Obama plan such as fraud and lack of demand for a company's products and services.

Would these ideas result in a few new, incremental hires? Probably. Would they reduce the high levels of unemployment significantly? Probably not. If a company needed additional workers, they probably would have hired them already. The political class does not understand a basic premise: the government does not create jobs, the economy does. These types of programs are all temporary: once the money runs out or the credits stop, the hiring levels are likely to revert back to where they were, much like car sales reverted back to their low levels once the Cash For Clunkers program expired. The government needs to get out of the job creation business, they never have done it well or permanently.

As specified in "Love My Country, Loathe My Government,", the best way to create jobs is to 1) reduce taxes permanently so that individuals and companies have more discretionary spending to use for economic activity, 2) government spending needs to be brought under control immediately in order to reduce the financial burden on the country and to free up capital for use by profit generating businesses (by constantly borrowing to fund a growing deficit, the government soaks up the finite amount of capital in the world that cannot be used by the private sector, the only source of incremental jobs), and 3) government regulations and bureaucracy need to be greatly reduced to make business and job expansion easier and quicker. Until the political class wakes up and understands that they cannot create jobs, we will continue to be faced with these types of ineffective programs and the country will continue to suffer.

We need new ideas and actions, not retread ideas form the 1970s that did not work then and are unlikely to work now. It appears that the Obama administration and the ruling political class are now grasping at straws and failed previous programs. Stupid is as stupid does, unfortunately, we all have to pay for it with ever increasing taxes.


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