Play the advisor game
Sep 1, 2010
3 minute read

The New York Times has a piece on Obama’s latest stimulus proposals.

[Obama] chided Senate Republicans for engaging in “pure partisan politics” by holding up a jobs bill that would offer tax breaks to small businesses and ease credit with a $30 billion initiative to channel loans through community banks.

Community banks!? That‘s the stimulus plan?

The president also said he and his team were “hard at work in identifying additional measures,” including extending tax cuts for the middle class that are scheduled to expire this year, increasing government investment in clean energy and rebuilding more infrastructure.

What a joke. Sorry, but none of these is going to make a significant contribution to ending the recession.

Maybe we can help Obama identify some additional measures to stimulate the economy. Here are the rules. First, your proposal must be revenue-neutral, or at least very cheap. Second, Sumnerian monetary policy (which I support) is off the table as “too obvious,” as is encouraging people to counterfeit. Third, your proposal needs to provide actual short-term stimulus, not just be good long-term policy.

My proposals:

First, permanently eliminate the employer portion of the payroll tax and charge it to employees instead. Remember, in the long run this change makes no difference whatsoever, since the incidence of a tax is the same no matter who technically pays it, as long as prices are flexible. But the reason labor markets don’t clear in recessions is that the price of labor (the wage) is not flexible. Real wages need to fall to clear the market. Shifting the payroll tax burden to employees would be an immediate cut in real wages, which would induce greater hiring and a lower quantity of labor supplied, moving the market closer to clearing.

Second, let in several million more immigrants. There are 19 million unoccupied houses in the country. The malinvestment in housing has decreased homeowners’ and investors’ net worth, which is creating fear and uncertainty. The wrong way to solve the housing problem is through subsidies which encourage further malinvestment. The right way is to make the malinvestment an ex post good investment. This can be done by importing residents, demanders of housing. Start by eliminating quotas for H1B and student visas, but ultimately, if people promise not to go into the construction industry, let them in. This proposal would have been even more stimulative during the financial crisis when it could have also propped up the value of mortgage-backed securities, but it would still do some good now.

Are there flaws in my proposals? What would you suggest instead or in addition?