Unexpectedly Intriguing!
December 8, 2010

Could the answer to this question be the just announced tax deal and the so-called "doc fix"?

Unemployment Line in the 1930s, Source: phoenix.gov

Here are the arguments that might be made for why these two separate actions by the lame duck 111th U.S. Congress might have succeeded in spiking the job market in 2011.

First, we'll consider the tax bill compromise between the Obama administration and the Republican minority in the U.S. Congress. The bill, at first glance, would appear to contain a number of provisions that would tend to promote job creation, but not as much as you might think on first glance, such as:

  • Extending the Bush-era 2001 and 2003 tax cuts for all income earners for two years. This measure would eliminate the risk of having tax rates revert to their prior, higher levels on 1 January 2011. This provision then prevents the hit to consumer discretionary income that would otherwise result from the expiration of these tax cuts. As far as new job creation though, the effect would be largely neutral because those rates are already in effect today.
  • Extending jobless benefits covering the next 13 months for the long-term unemployed. This measure would allow unemployed individuals who were laid off from their jobs to continue to receive extended unemployment insurance benefits beyond the 26 weeks that the law had previously provided up to as many as 99 weeks. This measure then avoids the hit to consumer spending that might otherwise have occurred if the law had reverted back to the previous standard. As such, it doesn't do much, if anything, to create new jobs and actually creates strong disincentives for the long-term unemployed to consider taking on available lower-income jobs before their benefits run out. Since those extended benefits have been in place for much of 2010, there's little additional spending that would occur to support new job creation.
  • Cutting the employee's portion of federal payroll taxes by two percent in 2011. This portion of the compromise will have a significant impact in putting more money in the pockets of American workers throughout the year. The hope is that a good portion of this additional money will be to be spent, which would boost the economy and help create jobs. Unfortunately, this tax cut would only last for one year, so the benefits will ultimately be temporary, as Americans would be more likely to use it for other things, such as saving it or using it to pay down debt. Meanwhile, employers will have to continue to pay the full employer's share of FICA taxes, keeping their cost of doing business at their present level. Since American employers' other costs of doing business are expected to rise, and given the temporary nature of this tax cut, employers will have little ability to add many new permanent jobs.

Just based on the tax bill compromise, we would expect to see some improvement in the job market in 2011, even though we suspect it will be mostly temporary. Unfortunately, the "doc fix" measure, which is intended to prevent a deep cut in Medicare doctors’ payments in 2011, which would otherwise lead many to drop Medicare patients from their care, also creates an extremely powerful disincentive for an unemployed worker to accept any new job before the end of 2011:

The deal on the table would change how much money consumers would have to repay if their income status changes mid-year, pushing them out of the eligibility bracket. For instance, someone who qualified for a subsidy because he was unemployed in the first half of the year may have to repay a large portion of that subsidy if he finds a job.

And all for the combined cost of an estimated $919 billion U.S. dollars that the federal government doesn't really have.... Consequently, we find that the real answer to the question we asked in the title of this post is "really perverse incentives created by the federal government."

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