A proposal: employment-linked tax incentives

One important unknown about the fiscal stimulus plan is how much bang for the buck it will provide.  Call it the Keynesian multiplier or whatever else you want, the issue is the magnitude of employment and real GDP a given fiscal spending can generate.  Much of the discussion about the stimulus plan focuses on the amount of stimulus needed, the composition of the spending boost, and the extent to which you need tax reductions to complement the spending boost.

My main worry about the efficacy of the fiscal stimulus--aside from the international spillovers in case it is not supported by equally ambitious fiscal plans elsewhere--is this: households that face considerable employment uncertainty, and hence about their to future income prospects, are unlikely to go on a big spending spree. Just as banks are hoarding cash, households will try to preserve wealth by increasing saving at the margin.  This reduces the marginal propensity to consume, and renders the fiscal boost rather ineffective.

Why not try to deal with the looming unemployment problem, and the huge sense of risk and uncertainty it creates, more directly?  What I have in mind is subsidizing employment directly by providing employers incentives to keep people on the job.  We could imagine for example a scheme whereby firms received tax incentives on a sliding scale in relation to the size of their payroll. If you reduce your payroll, you get nothing. If you keep it unchanged, you get tax benefits. If you increase it, you get even more tax benefits. 

This would allow firms to dismiss employees who are not performing and would not interfere greatly with the normal churning of the workforce. Firms could still lay off workers, but they would now have an incentive to hire enough new workers to make up for the reduction in their payroll.

The idea is to target employment more directly and to deal head-on with the most severe consequence of a recession: job loss or the fear thereof.  We have had a lot of thought on how to increase confidence in the financial system.  We also need to think some of about the loss of confidence on the part of ordinary workers. 

So call this a worker confidence enhancement plan.

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