Economists Float Solution for Congress to Muck Up: Wage Subsidies

If the news about increasing unemployment, the failure of the stimulus to address disproportionate unemployment among African-Americans or the “shovel-ready projects” that have been the least effect part of the stimulus makes you wonder if there really are any short-term solutions to address unemployment in this country, economists Bred DeLong, Alan Blinder and Larry Katz might have a ray of hope for you to cling to. They sent a letter to Congress, signed by a boatload of their colleagues, calling for wage subsidies to spur hiring.

In it, they ask Congress to offer firms a temporary, incremental tax credit for hiring new workers, saying that it will cause companies to hire people faster than they otherwise would. They want it targeted to firms that are growing, to maximize its effectiveness, and widely publicized, to maximize its utilization. The hope is that, unlike public construction projects, which take a long time to get to the hiring stage, a wage subsidy can quickly get unemployed Americans back to work and spur consumer spending, which would cause companies to hire more workers to meet demand, thus having an amplified effect relatively quickly.

Here’s the full letter and list of signatories, which includes Robert Reich and Joseph Stiglitz:

February 18, 2010

The. Hon Nancy Pelosi
Speaker of the House of Representatives
United States Capitol
Washington, DC 20515

The Hon. John Boehner
Minority Leader of the House of Representatives
United States Capitol
Washington, DC 20515

The Hon. Harry Reid
Majority Leader of the Senate
United States Capitol
Washington, DC 20515

The Hon. Mitch McConnell
Minority Leader of the Senate
United States Capitol
Washington, DC 20515

Dear Speaker Pelosi, and Messrs. Boehner, Reid, and McConnell:

A great number of different policy actions–including the American Recovery and Reinvestment Act, the financial rescue, and the extraordinary monetary policy measures taken by the Federal Reserve–have in their sum played an important role in changing the trajectory of the economy from one of terrible decline to one of growth.  But with the latest unemployment rate at 9.7 percent, it is clear that additional emergency policy measures to jump-start job creation are still warranted.

A well-designed temporary and incremental hiring tax credit is a cost-effective way to create jobs, and could work well in the current environment.  At a time when GDP is beginning to rise and demand is starting to return, private firms are likely to respond to such a tax incentive by hiring sooner and more aggressively than they otherwise would have done.  Such a credit could thus help put Americans back to work more quickly than otherwise.  And by targeting firms that are growing, such a tax credit supports the businesses most likely to lead the recovery of employment.

There are many ways to design an effective hiring tax credit, but in general the beneficial effects will be greater the stronger the hiring incentives and the lower the administrative burdens placed on firms.  It is critical that such a tax credit be put into place quickly and that it is publicized widely.  Firms will begin to accelerate hiring only when know they can count on such tax relief.

We judge that a well-designed hiring tax credit is a well-targeted and economically sound strategy for aiding job creation at this phase of the recovery, and so we support a well-designed hiring tax credit.

In our personal capacities, we are sincerely yours,

Mark Zandi
Justin Wolfers
Laura Tyson
Mark Thoma
Peter Temin

Joseph Stiglitz
Betsey Stevenson
Isabel Sawhill
Dani Rodrik
Robert Reich

Richard Portes
Larry Katz
Barry Eichengreen
Peter Diamond
Brad DeLong

David Cutler
Robert Cumby
Tyler Cowen
Menzie Chinn
Alan Blinder

George Akerlof