How Much Job Creation Is Enough? (Hint: Add a Zero) - Part 2

It's currently unclear whether President Obama's lobbying to get a new jobs bill through the Senate will prove successful. But assuming it does, and even if we accept the Administration's dubious assertions that its policies can generate enough jobs to restore pre-downturn employment levels by the end of 2012 (see Part 1 of this blog), that would still leave the overwhelming majority of the jobs overhang to work through.

At the official rate of 9.7%, 14.9 million Americans is the official number considered unemployed, but the Bureau of Labor Statistics also recognizes 2.5 million discouraged workers and some 9 million under-employed who want full-time work but can't find it. That means officially, over 26 million people may be competing for any new jobs the Administration can create.

Unofficially, what the BLS doesn't acknowledge is that there are something like another 50 million Americans -- over and above those 26 million job seekers -- who could and would choose to work if jobs were available, but who can't find them and who have been defined out of the workforce altogether. They include minorities, women, able-bodied seniors, working-age youth, people with disabilities, legal immigrants and other groups whose under- and unemployment rates are so dismal and so chronic the BLS methodologies have long excluded most of them from unemployment statistics. They are the hidden, structural unemployed, and their ranks are growing.

If the proposition is to put jobless Americans back to work, and reverse the structural damage that decades of policy neglect and jobless recoveries have done to the economy, we wouldn't need to create just 8 million jobs (the number lost since the downturn), or 11 million (the number we need to restore pre-downturn employment rates factoring in population and workforce growth), or even 26 million (enough to employ the officially counted discouraged workers and underemployed) -- we'd need closer to 80 million new jobs, an order of magnitude higher than even the most optimistic forecasts envision.

That should make it clear that when it comes to job creation policy, we don't just need incremental reform, we need a revolution. The industrial revolution raised production tenfold; we need an analogous revolution for job creation, this one focused on optimizing labor. New taxes and massive new stimulus spending are out of the question for political and fiscal reasons, as are massive tax cuts for business. Besides, we've tried all these and the track record shows they don't generate jobs on the scale we need.

But we can attack unemployment directly at the scale of the problem through something called payroll tax shifting. The idea is to cut payroll taxes, not just for a one-year holiday for small businesses, but for good and for all, eventually zeroing them out if possible, and replacing them with revenue from new taxes which don't discourage hiring.

Payroll taxes are the largest, most regressive taxes the great majority of Americans pay, they bring in about 35% of federal revenue, and they are job killers, dampening labor demand and job creation by raising hiring costs. In these times there are better ways to raise revenue than by cannibalizing job growth.

A payroll tax shift would replace lost PRT revenue dollar for dollar with new or increased taxes on non-labor production factors (materials, energy, land), which would dampen pollution and wasteful consumption of energy and natural resources. Instead of raising taxes or adding to the deficit, the tax shift would simply reallocate resources we already expend, shifting the tax burden in a revenue-neutral way off employment, and onto pollution, waste and harmful consumption

This would revolutionize the perverse price signals and investment patterns that now constrain the labor market. Social Security, Medicare and other payroll taxes total over 16% -- a 16% tax on hiring and an effective subsidy on consumption of non-labor inputs such as energy, natural resources and land. If we reversed that equation, and shifted the taxes off payroll and onto non-labor inputs, we could change their relative prices by over 30%, converting today's powerful disincentives for hiring people and conserving resources into powerful incentives. New or increased tax options range from a non-labor VAT to carbon fees and pollution taxes.

Economists predict reducing payroll tax rates by just ten percentage points could boost employment by ten percent in the long term. Couple that with equivalent new taxes on non-labor inputs, and the job creation effects roughly double: imagine 20% employment growth with a 10% PRT shift. Now imagine up to 200% employment growth with a 100% PRT shift. That would mean taking the roughly $850 billion annual payroll tax burden off employment, and shifting it onto resource consumption - a $1.7 trillion intervention we could accomplish without raising net taxes on citizens or businesses, and without growing the deficit. This would literally create many tens of millions of jobs.

That's the scale of the problem; it should also be the scale of the solution. Payroll tax shifting is the only policy on the horizon that can lay claim to it. It has been studied and championed by economists, for example as the most efficient way to recycle revenue from climate legislation into job creation. It has been advocated by smart conservatives and progressives alike, and tax shifting bills have been introduced into this Congress by members of both parties. If progressives really want to redress massive unemployment, and if conservatives really want a tax revolution and a return to economic growth, here is a way forward for both. Shift the tax burden off work and onto waste, ally progressive and conservative agendas, and instead of creating a few million jobs, we can create the tens of millions of jobs Americans need.