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Mosler: PAYROLL TAX HOLIDAY

Posted By Barry Ritholtz On October 7, 2009 @ 11:00 am In Think Tank | Comments Disabled

Warren Mosler, economist, perturbed by the misunderstanding of monetary policy by the current and past administrations, is running for President in 2012.  He has been speaking at the Tea Parties, explaining to taxpayers that Washington is either at best ignorant of economic policy or at worst deceptive.

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Federal Reserve Chairman, Ben Bernanke, has indicated that the economy is improving and the recession is ending. The media informs us that the stock market has added $2 trillion to national wealth since the market lows in March 2009. However, the stock market is still more than $2 trillion from its previous high in 2008 and real estate values are down $6 trillion and still declining. Not only has nominal wealth evaporated, but incomes are also treading heavy water. The Government informs us that unemployment is up to 9.8% with the only ‘good news’ being that the rate of job loss has declined. In July, there were only 2.6 million jobs available for 14.5 unemployed.

Also many are working part time when they want full time jobs. Americans are taking lower paying jobs and incomes are on the decline, especially when adjusted for the massive bonuses paid to bank employees and CEOs. The Department of Labor reported that young Americans (16 to 24 years old) have the highest unemployment rate ever (25.5% [1], although the New York Post [2] has it at 53.4%). Regardless, America has a large and growing under utilization of labor among all age demographics.

At the same time, state tax collections have been declining and budgetary constraints (balanced budget requirements) are placing enormous pressures on state finances, especially California.  In response, states and local municipalities are cutting jobs (teachers, policeman etc.), services, university, and infrastructure funding. Additionally, the states and municipalities are increasing taxes to gain the additional revenues.

The Administration and Congress are informing the public that everything is beginning to look good because of the trillions of dollars that they provided to repair the banks. The problem is that they have it backwards; the economy is best fixed from the bottom up rather than the top down.

In June 2008, Warren Mosler proposed three ‘bottom up’ policies to fix the economy. The first proposal is for a full Payroll Tax Holiday for both employees and employers. This stops the government from taking approximately $20 billion a week from people working for a living (a total of $600 per month for someone making $50,000 per year) rather than using that $20 billion to keep some bank limping along. The Government would still continue to credit the social security and the Medicare accounts, so employees and employers will never have to pay back the monies they received. The Payroll Tax Holiday would restore income to American workers (and businesses) to help make their loan payments, rents, pay bills, and sustain their households. The real economy would benefit as Americans both reduce debt and resume consumption. Banks will benefit because there will be fewer delinquencies and foreclosures in non fraudulent mortgages, which will also help limit home price declines.  The Payroll Tax Holiday would also reduce corporate cost structures and help contain prices and inflation. The payroll tax is regressive (it is not graduated based on income like the income tax), so the Payroll Tax Holiday will benefit those in the lower income levels the most.  This “People Power” solution will be far more effective than the Bush and Obama trickle down solution.  And the Government can decide to end the Payroll Tax Holiday should the economy become too strong and inflation become a concern.

The second part of the proposal would to assist the states by providing them with $150 billion in revenue sharing on a per capita basis with no strings attached. This will help the states to fund operations, keep workers employed, provide necessary services and fund infrastructure projects.

The third part of the proposal would be to fund an $8/hr National Service job for anyone willing and able to work that includes full federal health care coverage. This, like the Payroll Tax Holiday, addresses unemployment from the ‘bottom up’ rather than the ‘top down’. A determination can be made as to what the jobs will be, but the goal is to improve America by providing useful output. It will also provide for a far superior price anchor, as it has been well documented that private employers more readily hire those already working over anyone who is unemployed.  In 2001, Argentina introduced its Jefes de Jugar version of the Mosler Plan that employed nearly 2 million people that had never worked in the private sector, and within two years 750,000 moved up to private sector jobs.

If any of these proposals strikes a personal chord regarding how we can rebuild our economy, please forward them to your elected representatives in Washington. These are not proposals for out of control, top down, trickle down, Government spending on corporate welfare that insults the majority of Americans working for a living, but fundamental, proven, bottom up solutions that reward that vast majority of Americans that work for a living and struggling to make ends meet.

Sources

  1. Mosler 2012 [3]
  2. Barry Ritholtz, Read it here 1st: Truest Picture of Excess Labor Supply [4]
  3. Barry Ritholtz, Post-Recession Employment Arithmetic [5]
  4. Bloomberg, U.S. Home Prices May Be Lost for a Generation [6]
  5. Bloomberg, Unemployment Confronts Obama Rhetoric With Chronic Joblessness [7]

Article printed from The Big Picture: http://www.ritholtz.com/blog

URL to article: http://www.ritholtz.com/blog/2009/10/payroll-tax-holiday/

URLs in this post:

[1] 25.5%: http://www.huffingtonpost.com/2009/09/05/teenage-jobless-rate-reac_n_278169.html

[2] New York Post: http://www.nypost.com/p/news/business/the_dead_end_kids_AnwaWNOGqsXMuIlGONNX1K

[3] Mosler 2012: http://www.mosler2012.com/

[4] Read it here 1st: Truest Picture of Excess Labor Supply: http://www.ritholtz.com/blog../2009/09/read-it-here-1st-truest-picture-of-excess-labor-supply/

[5] Post-Recession Employment Arithmetic: http://www.ritholtz.com/blog../2009/10/post-recession-employment-arithmetic/#comments

[6] U.S. Home Prices May Be Lost for a Generation: http://www.bloomberg.com/apps/news?pid=20601039&sid=aiiT.sNeq2YQ

[7] Unemployment Confronts Obama Rhetoric With Chronic Joblessness: http://www.bloomberg.com/apps/news?pid=20601109&sid=aDx_Srx0Sv8Q

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