So now that the stimulus hasn’t been able to show any weathering to the recession, (except for maybe in a few states) momentum has been gained (thanks to the NYT article here) in igniting talks over the blogosphere, especially with economists, over whether a job tax credit is a good idea or not. Alex Tabarok at MR has rattled off — not only including those in support mentioned in the article — those in the blogosphere who are in support, which is an impressive list.
So what do I think? From what I understand in labor economics is that a decrease in labor cost will be able to increase the demand for labor. In a comparative static equilibrium model for labor markets, it is a beautiful thing — questions I would love to be asked when learning them during economics class. Reducing the labor cost should be able to shift the supply curve forward, increasing the quantity of labor demanded which translates into more jobs. In addition, the tax credit doesn’t affect the variable marginal product of labor because new employees don’t have to worry about taking lower wages.
However, isn’t AD what we are trying to shift outwards? I don’t see how employers will find the incentive for replenishing some of the dead weight loss when AD can’t meet the supply. I would assume that this could lead to cheaper prices for consumers, but this could only happen in the long term and I don’t think that 2 years is enough of a time frame for capital investment to catch up. I won’t discount the fact that the economy is much more dynamic and that an emphasis can be placed more on labor, rather than capital. But the economics to me is murky, and for that matter, without another proposed stimulus in the works, this wouldn’t have much of an impact that we believe it would have. It would have been best if the tax credit provision was included in the original stimulus. I will say that much of the stimulus funds are still working their way through and that this could be the last step in helping to boost a recovery within the economy, especially in slowing the accelerating unemployment.
Update: Mankiw just posted a great critique on the tax credit.