But to evaluate the stimulus properly we should consider not just what we got for the $787 billion cost but the effects of alternative policies that might have been enacted.Unfortunately, the Democrats are thinking not only of doing passing more of the same sorts of programs that haven't worked this year. On top of that, they're considering job-killing ideas such as tax hikes and increased environmental regulations.
My Stanford colleague Pete Klenow and Rochester economist Mark Bils estimated that cutting the payroll tax by six percentage points (of the 12.4% Social Security component) would, under standard assumptions, increase employment by three million to four million workers—an amount equal to all the job losses since the stimulus was passed.
The payroll tax cut would have reduced firms' costs by roughly the same amount as from the entire decline in employment. It would have cost less than half as much as the stimulus bill, gotten far more income into paychecks quickly and, most importantly, greatly reduced incentives for firms to lay off workers. In fact, it would have created incentives to hire.
Even using the administration's claims of one million jobs "created or saved," the stimulus program passed in early February is millions of jobs short of what a cheaper payroll tax suspension would have delivered.
Yet the president and Congress are preparing vast new taxes on employment in the health-care reform and other legislation. Raising the federal top tax rate to 45% (from the current 35% with a 5.4% surcharge plus the expiration of the Bush tax cuts) will hit successful small businesses especially hard. The tax hike on capital gains and dividends hidden in the fine print of the health-care legislation will also raise the cost of equity capital, further weakening businesses (including banks) desperate for private capital. Many firms will also face either an 8% additional payroll tax or be forced to pay a higher share of health insurance premiums. Such tax increases will hit employment and wages hard.Sadly, they can't seem to learn from their previous mistakes and think that if they just do more of the same programs that have failed to promote job growth, they'll get a different result.
It's time for a reset button on Congress's approach to stimulating jobs.