Treating the Symptom
Tonight, President Obama will lay out his proposed legislation for increasing employment. He is expected to renew the payroll tax cut and to extend unemployment benefits. He will propose other programs and incentives to get jobs for the unemployed, raising concerns that employment programs can create a welfare state where there is little incentive or opportunity for permanent employment. The early word is that President Obama’s program will increase the national debt by an additional $300 billion.
Labor is often the single largest cost by far for business. The Fed actively slows down growth whenever there is a risk of full employment (3-5% unemployment). The Fed believes full employment drives wages higher, which is inflationary and thus unhealthy for the economy. Unemployment over 5% can create a large pool of flexible labor at low cost, which is good for business. The concern is that the current unemployment range of 9-10% can be deflationary as companies lower wages to increase profits, only to lose their wage savings to competitive forces, putting further pressure to lower wages.
The number of people who have stayed unemployed is a lagging indicator. The number of newly unemployed people and the trend of unemployment is a coincident indicator. Stock prices are a leading indicator. The last 52 weeks, the S&P 500 has appreciated 11%, suggesting that businesses will do well in the future. Businesses cut costs, increase productivity and go where growth and business opportunities abound, which while good for business could result in a weak economy where costs are high and growth prospects are low. Treating the problem by creating an environment conducive for business may be a better solution than treating the symptom by artificially driving up employment.
Treating the Problem
Consultants at the big accounting firms teach US companies to hire offshore employees in offshore companies and to transfer US-based income to offset US taxes. Under the current regime it can be cheaper to hire offshore and avoid taxes, even if employee costs are identical to that of a US employee.
US businesses hold capital offshore where it avoids being taxed in the US and instead is being used to fund international growth, making it more profitable to invest overseas than in the US where it would be taxed, even if investment prospects are identical.
To grow businesses in the US, and to attract back runaway employment, the environment needs to be cheaper and easier to do business. The most obvious cost that policy makers can discretionarily cut is corporate taxes. If more employees are then hired, and wages go up, state and federal income taxes from wages will go up to fill the void from corporate tax cuts. If businesses have to pay high taxes and other costs, then pressure for businesses to go elsewhere or reduce their discretionary costs such as wages could inversely reduce tax revenue and hurt the economy.