The nettlesome Paul Krugman points out that President Bush’s proposed $726 billion tax cut, which Bush claims would create 1.4 million jobs, would cost the government $500,000 per job, each of which would pay an American worker an average of $40,000. (*)
It would be cheaper to just hire people into a public works program, or just send people checks for doing nothing. So where would the rest of the tax cut go? As Bush prepares to cut education, assistance to the poor, and infrastructure to pay for the tax cuts, the rich prepare to line their pocketbooks, laughing all the way to the bank.
Update: 23 April 2003. Donald Luskin says Paul Krugman is wrong, wrong, wrong. (†) He is joined by Just One Minute (‡) and Lynxx Pherrett, in comments. There are two complaints.
Initially, they say, the $726 billion tax cut is spread over several years, while the 1.4 million new jobs figure, from the White House’s Council of Economic Advisors (CEA), is only through 2004. Luskin notes that if you assume that job growth after 2004 as a result of the plan is 500,000 per year, the plan looks much better. Nevertheless, in the CEA report, they estimate that after 2004, annual job growth as a result of the plan will be less than 200,000, though they do not account for the full effect of the tax cut. (§ PDF)
On average over end-2002 to end-2007, job creation as a result of the package would be 140,000 higher than otherwise. This indicates that the proposal would bring forward a good deal of the job creation that would otherwise have occurred in 2005 and beyond (and add some as well). As noted above, the statistical model used for the projections does not include any supplyside effects under which lower tax rates would be expected to boost labor supply and further improve job creation. Corporate income tax relief would likewise be expected to lead to positive supply-side effects through improved allocation of capital across the economy and thus higher growth and job creation—again, however, this is not reflected in the numerical projections.
(** previously cited) The CEA estimates that about the tax cut will increase GDP growth by 0.2% per year through 2007, and will create only about 170,000 new jobs per year through 2007. As Luskin notes, the tax cut is front loaded. Most of the benefit in jobs will occur early on. As time passes, the effect will wear off significantly. Because this report does not and perhaps cannot account for long-term changes in the ability of the economy to grow, it is not complete. Nevertheless, it remains striking that Bush is willing to settle for only 1.4 million new jobs from now until 2007, and at such a steep price. President Clinton helped create no fewer than 20 million new jobs in his term in office. I hope that whatever plan is enacted does create at least 1.4 million new jobs, as that will offset the 1.4 million jobs lost since President Bush’s last tax cut. (††)
Luskin also cites his friend Reuven Brenner who believes that Krugman’s comparison is inapt as it compares a flow (new jobs) with a stock (tax cut). (‡‡) Of course, though, the tax cut will be permanent, and thus, like a job, will be a flow, and not a stock. To be completely accurate, both Krugman and the CEA should be using present values.
In all, Krugman’s estimations are crude, but so are the CEA’s. I wonder if we couldn’t get a similar boost to jobs with a tax cut of a mere $350 billion or smaller.