Wednesday, February 3, 2010

CBO estimates of stimulative effect of payroll tax cut underwhelming

The Congressional Budget Office released a letter to Sen. Robert Casey (D-PA) estimating the effects on employment of a proposed policy of giving employers a one-year, nonrefundable credit against their payroll tax liability for increasing their payrolls in 2010 from their 2009 levels. Here's the short story:

CBO estimated that reducing payroll taxes for firms that increased their payrolls would raise output (gross domestic product, or GDP) by a total of $0.40 to $1.30 between 2010 and 2015 for each dollar of budgetary cost. CBO also estimated that the policy would add 8 to 18 cumulative years of full-time-equivalent employment in 2010 and 2011 per million dollars of total budgetary cost. Thus, the cost of increasing employment by one full-time person for one year in 2010 and 2011 would probably be between $56,000 and $125,000. Although such a policy would have economic benefits in the short run, it would also add to already large projected budget deficits. Unless offsetting actions were taken to reverse the accumulation of additional government debt, future incomes would tend to be lower than they otherwise would have been.

Given that the median wage of a full time worker is around $37,500, effectively paying $56,000 to $125,000 to produce each job sounds a bit steep to me. With this policy – as with, it seems, much of the rest of the stimulus bill – it may have been more cost effective for the government create employment by directly hiring new employees than by indirectly attempting to stimulate the economy. (That said, a private sector worker produces goods and services while a government worker produces, well, more government, so there's more to the equation than that.) In any case, this isn't very encouraging news.

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