Let's make some work

All too often it seems policymakers equate increased spending with job creation, or job creation with increased spending. The two are directly correlated, in a Keynesian macroeconomic sense, which is exacerbated by all kinds of negative feedback cycles during a recession (asset depreciation, liquidity traps, wage-demand spirals) but far from the same. But does it really cost $500,000 of direct government appropriations to create a job? That’s the not so pretty math update from the Recovery Act, which has spent about $350 billion so far and created some 700,000 jobs. Just as an employer creates jobs because of the marginal productivity of that job, and not tax rates, e.g. an employer will hire a worker at salary $X if they produce something worth >$X if the tax rate is 50%, but not hire if the salary exceeds the value of marginal product even if the tax rate is 0%- the government only drives organic job growth when it's profitable. Otherwise when the appropriation runs out, the job runs out. Employers would prefer to keep more of their profit, but they don’t care how much the government takes of non-existent profit. So tax rate arguments are of almost secondary importance- of primary importance is industry, market creation.

As DC turns to Job Creation: Act II, the focus should be less on throwing more money out the door, and more on making promising nascent growth industries profitable. Temporary government expenditures will create more temporary jobs, two or three year tax credits in long-term infrastructure driven sectors, like clean energy or biotech, will continue to not pencil out on 30-year amortized balance sheets. Profits won’t return to Main Street until new industries are profitable industries. America will only sustainably recover from the latest credit driven asset depreciation shock when there is either paradigm shifting technical innovation that changes the profit calculus (say of silicone being cheaper than coal, or server space being cheaper than a piece of paper; a hard bargain), or when the government just decides to change the calculus itself.

Congress could establish a set of 30-40 year tax credits and streamlined regulations (the one or two year stuff they’re used to releasing a couple months after the last temporary set expired doesn’t fool even the macabre neophyte investor class) that will spur private sector investment and growth. On my short list of such credits? for starters a $.03/kWh clean energy production tax credit, cheap leases on set-aside government land to build new energy infrastructure, 50% tax deductions on all mass transit investments, and 30% tax offset for all biotechnology investments. Tax attorneys could fill in the details. And perhaps most beneficial of all, tax credit driven job creation would change government receipts (perhaps offset by higher top-end marginal income tax rates), but not directly add to deficit spending. The annual $1.4 trillion deficit we run now mandates we not continue short-term stimulus spending into the long-term, only further raising the cost of capital and chocking off promising nascent industries. The bottom line is there needs to be a paradigm shift from spending to incentivizing, from direct expenditures and subsidies, to indirect industrial tax policy. That’s why the much heralded “Jobs Bill” Leader Reid and Speaker Pelosi are corralling should not fall into the trap of thinking the only way for the public sector to create private sector employment is too bequeath it money, rather it could simply make it profitable. For all the economic carnage out there, we should begin to focus a little less on triage, and a little more on getting well.