An economist once told me it works a lot better to pull a thread than push one. His point was that demand, not supply, is the trigger for economic activity.
President Obama’s job-creation proposal — which involves tax credits for businesses that hire employees — strikes me as an effort to push the thread. No rational employer will hire employees unless demand exists for its product. If a tax credit convinces employers to ignore the economic realities, it’s a bad thing. My suspicion is that it is time to step back from stimulus efforts altogether. If, despite national debt issues, we are to continue efforts to stimulate the economy, we should be looking at it from the demand side.
How to do that? One-time increases in unemployment benefits make the most sense, because almost none of that money ends up in savings and it helps those who need it most.
The problem with a tax credit for job creation, aside from its potential to distort rational views of demand, is that it would undo some of the benefits if the economy rebounds. An economic rebound — that is, an accelerated increase in demand that corresponds with renewed consumer confidence — would create jobs with or without tax credits. The main significance of the tax credit, therefore, would be to compromise efforts to reduce national debt.
Obama is in a tough political situation, but I wish he would hold fast. Much of the stimulus money has yet to work through the system, and the economy is showing obvious — if not dramatic — signs of improvement. (Note the 5.7 percent annualized GDP growth in the 4th quarter.) Now is not the time to increase our debt with fixes that may not be necessary.