As President Obama continues campaigning for yet another round of stimulus it appears now that even democrats are beginning to question the soundness of this strategy. This new focus includes a $5,000 tax credit—among other items— for any business that hires a new worker—effective the year the legislation is passed. Of course, the intended effect of this new policy may win some political points for the President and legislators, yet this effect does not override the fact that this maneuver is simply bad economic policy.
Creating a tax credit for hiring new workers will not create an incentive for already-struggling companies to begin hiring—which is the overall intent of this policy. This could even result in some currently unemployed individuals remaining unemployed until the tax credit is passed into law, or similarly, some companies firing some workers and then re-hiring once the tax credit is passed into law.
Businesses are not making the decision to not hire—or lay off current workers—because they simply want to keep their workforce smaller. Instead, as a result of depressed demand during the recession, companies are continuing to face lower sales and overall revenues. Most companies—particularly small- and medium-sized companies—are making these employment decisions to shore up on costs to survive during the recession. As an example, if a company determines that a worker is too costly to employ at $25,000, that worker will remain costly at $20,000, especially when there is no new work for the company. This is holds for a business of any size.
Business owners want to see the economy rebound so that they can begin productively employing more workers. However, the net effect of this tax-credit-for-hire policy—given the mix of other mandate costs and regulations companies stand to face with potential federal legislation—could turn out to be negative.
Federal health care reform policy is still alive, including punitive employer mandate costs that have been attached to these bills and expanded Medicare payroll taxes. The estate tax—which is a significant drag on American family-owned businesses—has not been permanently repealed and new energy taxes as part of proposed federal cap-and-trade legislation still loom. This is in addition to the other tax cuts and reductions that expired December 31, 2009 all of which provide incentives for small and medium-sized businesses to grow and productively employ workers.
To get companies of all sizes to productively hire more workers—and encourage entrepreneurs to bring new innovative and productive ideas to the economy—President Obama and federal legislators should re-focus their efforts on tinkering with economic policies that actually create the incentives for companies to form, innovate, and productively expand .
The President asserted during a major speech in January: “One of the greatest contributions the United States can make to the world is to promote freedom,” he said. “A creative, competitive America is the answer to a changing world, not trade wars that would close doors, create greater barriers and destroy millions of jobs. We should always remember: Protectionism is destructionism.”
But the President who spoke those words was Ronald Reagan, in his very last State of the Union Address about 20 years ago.
How would President Reagan respond to today’s cynicism and doubts about the benefits of international trade and globalization? Some policymakers and politicians have increasingly argued that free trade primarily benefits low-wage countries, with outsourcing to their shores coming at the expense of our workers. But can we really protect jobs by erecting more barriers and by playing to people’s fears?
President Reagan likely would disagree, gently saying “no.”
The surest way to adapt to today’s rapidly-changing global economy is to remain creative and flexible – and therefore competitive – by enhancing economic freedom, rather than eroding it through protectionist measures and lingering government intervention. Economic freedom fosters the spirit of entrepreneurship and innovation that creates new products and jobs. It has sustained America’s strength and the creation of wealth.
America has proved time and again that the right policies – those that enhance economic freedom – can create an enduring link between economic opportunity and prosperity. For example, more open trade policies over the past decades have enabled our economy to expand by more than 40 percent and boosted job growth.
It should also be remembered that America’s trade and economic policy has persistently supported an integrated global economy, stimulating our strength as well as economic development in many parts of the world. Today’s cynicism and doubts about the benefits of capitalism should not abruptly bring to a halt America’s long-standing commitment to openness and economic freedom.
However, our leadership in advancing economic freedom is losing ground, undermining our economy. According to the 16th edition of the Index of Economic Freedom, released last Wednesday, our economy is no longer a member of the world’s “free” economies.
Other economies such as Switzerland and Canada are freeing their markets and advancing their economic freedom at a faster pace than the United States. The United States is, in many respects, moving in the opposite direction, simultaneously burdening its economy with increasing government spending, onerous regulations, uncompetitive tax rates, and barriers to trade and investment that stifle entrepreneurship and job creation.
By burdening our economy with bigger government, we are dangerously creating an economic environment where opportunity and mobility get obstructed. The traditional American faith in upward economic mobility – widely understood to be the American Dream – seems more elusive now than ever.
The results of the 2010 Index are plain to see. Detailing quite a slide in our economic freedom, the Index makes clear why our economy is failing to generate jobs. It should be a wake-up call for the White House and Congress, just as people surprised Washington with their strong voice in last Tuesday’s special election.
Perhaps, in preparing for his second State of the Union Address that is scheduled on January 27th, President Obama should be reminded of other words of President Reagan, whom he admires for “for changing decades of political discourse and streamlining the government.”
As President Reagan reminded us, “government can and must provide opportunity, not smother it; foster productivity, not stifle it.” This wisdom is the key to sustaining a healthy, growing economy that expands the circle of prosperity for our coming generations.