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Wrong Culprits: What's NOT Stopping Job Growth

Ben Peck

With unemployment above 9 percent, creating more jobs is an urgent priority for the United States. But it is difficult to have a sensible debate on how to spark job growth given the myths and misinformation that surround this issue. Specifically, many political leaders and analysts wrongly point to three culprits in explaining weak job growth: government regulations, the new healthcare law, and taxes. None of these explanations hold up under closer scrutiny.

Regulation Isn’t Stopping Job Growth

Proponents of smaller government routinely argue that cutting back on regulation would create more jobs. In a recent Washington Times column about how to reduce high unemployment, Heritage Foundation president Ed Feulner wrote that “One of the biggest factors behind whether companies hire or not is regulation.” In fact, though, there is little or no connection between today’s high unemployment rate and the regulations on business.

In 2007, the average unemployment rate was 4.6 percent. That figured doubled by 2009, to 9.3 percent, not because of any major changes in regulation – since none occurred – but because of the financial crisis. Today, most economists agree that the main reason that companies aren’t hiring new workers is the lack of consumer demand. More generally, regulation is not a major determinant of employments levels – which have fluctuated over the past half century in ways divorced from regulatory trends. For instance, unemployment was higher between 1955 and 1960, before much current regulation existed, than in the second half of the 1990s.

That major economic trends, not regulation, determine hiring is underscored by companies’ own reporting on layoffs. Since 2007, companies laying off 50 or more workers have had to report to the U.S. Department of Labor whether “regulations” were the cause of layoffs. From 2007 to 2009, according to the Labor Department’s figures, a miniscule proportion of layoffs, 0.3 percent, were caused by regulations.

One reason regulation has little impact on overall job growth is because the “cost” of regulatory compliance for one company is generally a benefit to another company, as an analysis by the Economic Policy Institute shows. For example, when a company that owns a coal plant has to invest in sulfur dioxide scrubbers for the plant’s smokestacks, the company may have less cash on hand to hire workers at its plant. However, the money spent to comply with clean air standards produces jobs at a company that builds and installs sulfur dioxide scrubbers.   

Another upside of regulation is that there are economic benefits to better air, increased worker safety, and so on. An analysis by the EPA of the Clean Air Act, for example, has found that in 2010 the Act prevented 160,000 cases of premature mortality, 130,000 heart attacks, 13 million lost work days, and 1.7 million asthma attacks – all gains with positive economic effects.  

Meanwhile, the lack of strong regulation can have clear downsides for jobs and economic growth. Weak regulation of the mortgage business and financial sector is a major cause of the financial crisis – and the recession and high unemployment rates that resulted.

Health Care Reform: Not a “Jobs Killer”

Earlier this year, one of the first acts of the new Republican majority was to overturn health reform with a bill "To repeal the job-killing health care law." That effort was rejected by the Senate, but opponents of the Affordable Care Act continue to argue that the legislation will hurt job growth by increasing the cost to businesses of employing people. Many go further, arguing that the law – which mostly doesn’t take effect until 2014 – is putting a big damper on job growth today by deterring new hiring by employers who are nervous about the law’s requirements. Nearly all GOP presidential candidates, for example, say that one way they would jumpstart economic growth in 2013 is by immediately repealing “ObamaCare.”

These views about the link between jobs and the Affordable Care Act are mistaken. In fact, the law won’t have much impact on employment at all according to several recent studies. While the law will lead some employers to reduce employment by increasing their labor costs, the “expansion of coverage through Medicaid and income-related subsidies in the exchanges would have the opposite effect on spending and employment,” according to an analysis earlier this year by the Urban Institute. In addition, according to this study, the new law will “not affect most firms, either because they already provide health insurance meeting the new federal standards, or they are exempt from the new requirements (firms with fewer than 50 workers).” Overall, the law’s net effect on job growth in a $15 trillion economy is likely to be minimal.

Critics of the healthcare law have regularly cited the Congressional Budget Office in arguing that the law will “kill” 800,000 jobs. Earlier this summer, Michele Bachman asked: “What could the president be thinking by passing a bill like this, knowing full well it will kill 800,000 jobs?" In fact, as explained by PolitiFact, what the CBO said is that some workers might leave the work force because they wouldn’t need the health coverage of their jobs as public systems, such as Medicare, offered better coverage. That same CBO report said that “many of the effects of the legislation may not be felt for several years because it will take time for workers and employers to recognize and to adapt to the new incentives.” In other words, a law that fully takes effect in 2014 may not start to have whatever impacts it has on labor markets until maybe 2016 or 2017. Repealing the law tomorrow would not only do nothing to solve the current jobs crisis, but could worsen that crisis by taking away a new tax credit created by ACA that helps small businesses offset their healthcare costs and which has already taken effect.

Tax Cuts Won’t Solve Jobs Crisis

A third mistaken assertion is that high taxes are holding back job growth and that cutting taxes is a key to reviving prosperity and boosting employment. President George W. Bush summed up this view last year when he said on CNBC, “If one is interested in job creation in the private sector, it is important to recognize that lower taxes enable the job creators, i.e., small businesses, to have more money with which to expand their work force.” House Republicans have argued that the major tax cuts proposed under Paul Ryan’s plan would help solve the jobs crisis, while several Republican governors at the state level have enacted new corporate tax cuts aimed at boosting growth. Meanwhile, corporations are lobbying hard for a tax holiday on repatriated foreign earnings, saying that this would lead to new job growth.

Tax cuts can indeed function as a form of stimulus, especially when they are targeted at lower income households and put cash in people’s pockets immediately. The partial payroll tax holiday, the “cash for clunkers” tax credit, and the $8,000 tax credit for first-time homebuyers are all examples of tax cuts that have helped stimulate growth. In contrast, tax cuts that mainly benefit business and the wealthy have very limited stimulative effect. For example, a 2010 study by economists Mark Zandi and Alan Blinder found that each dollar in corporate tax cuts only creates $.32 in economic activity, compared to $1.24 for each dollar in payroll tax cuts. Likewise, extending the Bush income tax cuts only created $.32 in activity and extending lower tax rates on dividends and capital gains only yielded $.37. A tax holiday on repatriating foreign profits would likely have even less effect given that, as noted earlier, a lack of consumer demand – not a lack of corporate cash – best explains why companies are not hiring workers. In fact, U.S. corporations were sitting on a record $2 trillion in cash during 2010, more than they had on hand before the recession.

Even the most stimulative tax cuts do not create as much economic activity as direct government spending. For instance, the Zandi/Blinder study found that every dollar spent on food stamps created $1.74 in economic activity. Other highly effective forms of stimulus included infrastructure ($1.57), unemployment benefits ($1.61), and general aid to state government ($1.41). Overall, policymakers serious about created jobs should prioritize government spending over tax cuts.  

A final point: the connection between economic growth and tax policy is weak. Taxes went up during the Clinton years – and so did job growth. Indeed, tax revenues as a percentage of GDP hit an all-time postwar high of 20 percent in 2000, the same year that unemployment averaged just 4 percent, its lowest level since 1968. Tax revenue fell dramatically during the Bush years, a period of low unemployment but little net new job growth, few gains in household incomes, and anemic rates of GDP growth overall. Comparisons between states also find that tax rates are not a decisive factor in growth job.

This post is part of Demos' "America Can Work Better" Week.