Friday, December 11, 2009

Arnold Kling's brainwave.

Arnold Kling has produced a great idea for producing jobs, as follows.

“Cut the employer contribution to the payroll tax. In the short run, this will reduce labor costs and increase profits. This will lead firms to expand and to raise employment. In the long run, it will lead to higher wages. When recovery comes, you can either bring back the payroll tax or replace it with a less regressive tax.” And that’s it.

Why on earth would increased profits “raise employment”? It is obvious that IF increased profits result from increased orders (i.e. increased demand) then employment will rise. But in this case the increased employment results from the increased demand, not from the increased profits as such.

Put another way, anything with artificially increases profits (like a payroll tax reduction) will have no effect on employment whatever if it does not increase demand. Since Kling does not tell us whether his reduced payroll tax is budge neutral or not, it is entirely unclear as to whether his proposal WILL involve an increase in demand.

Does he understand macroeconomics?

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