An Example of Economics at Work

I’ve stayed out of politics this fall, but a comment on Obama‘s new economic proposals is a good teaching device.

He has proposed an income-tax credit of $3,000 for each new job above a company’s current employment level in the next two years.

We did something very similar in 1977, the New Jobs Tax Credit (N.J.T.C.), and it illustrates economics at work.

Unlike inefficient subsidies that provide funds for an activity that would have been undertaken anyway, this kind of marginal tax credit only subsidizes new activity. The benefit per dollar of credit is greater with this approach; it is more target-effective.

Indeed, a number of studies evaluating the old N.J.T.C. suggested it had substantial effects in stimulating employment.

Moreover, the jobs created especially benefited low-wage workers: not surprisingly, since the cap on the credit per worker made it a more attractive percentage subsidy for hiring lower-skilled, lower-wage workers.

Theoretical work suggests it is especially likely to be successful in an economy that is sliding further away from full employment, as we now are.

(Full disclosure: I was one of several who worked on this proposal in the mid-1970’s; like all the others, I take a lot of credit for it. The old saying “success has 100 fathers, failure is an orphan” is relevant here.)