A bust from the past

The Jimmy Carter Jobs Credit

Excerpt:

The latest Senate Democratic bill will cost $85 billion and is shaping up to be largely a rehash of last year's stimulus: extended unemployment insurance, Medicaid cash for the states, and some public works spending. The one new twist is a proposal for a one-year $5,000 tax credit for small businesses for each new worker hired. President Obama calls the credit "the best way to cut taxes" to help small businesses.

But we've also seen this economic movie before—in 1977 under Jimmy Carter. During the two years it was in effect, a jobs credit worth about $7,000 in today's dollars became a $20 billion free lunch as businesses claimed the handout for one of every three new employees.

In the short term, the Jimmy Carter jobs credit appeared to reduce unemployment. The jobless rate dropped by 1.2 percentage points (to 5.8% in 1979 from 7% in 1977). But that effect was short-lived, and when the subsidies ended two years later the layoffs resumed and the unemployment rate rose again and by 1980 was back to 7.2%.

Citing this not-so-happy experience, Wisconsin Democrat Ron Kind says the tax credit is evidence that Congress doesn't "do anything new around here except the history we repeat." The left-leaning Tax Policy Center recently looked at a proposal for a $5,000 payroll tax credit, which is similar in concept to the Senate jobs credit, and concluded that "The problem with subsidies such as this is that they are exceedingly sloppy. A lot of money goes to those firms that would have hired anyway."

They're right: The Labor Department reports that in December 2009 there were 2.5 million job openings. Will the government pay $5,000 for every one of these new jobs that would have existed anyway? In the dynamic American economy, thousands of workers are hired, fired or quit each day.

The President is trying to lure Republicans to support this policy as a "business tax cut." But they should know that it violates sound tax principles. Pro-growth tax cuts, as adopted so successfully by JFK in the 1960s and Ronald Reagan in the 1980s, are broad-based and lower tax rates for as many people as possible. This reduces the distortions of the tax system, while permanently adding to the rewards for investment and risk-taking.

Comment: A jobs bill like this will just increase government bureaucracy and waste. The only growing job segment is the government.