A New Way to Boost Job Creation -- and Help Save the Planet

U.S. growth slowed sharply in the spring of both 2010 and 2011; but it looks like this year, the economy may have fin ally shaken its good-weather jinx.  New home sales are up and foreclosures are down.  Housing prices are still falling, but at a progressively slower rate which may signal that home prices are bottoming out.   Businesses added only 130,000 new jobs last month, but the jobless rate and first-time jobless claims keep falling.  Perhaps, it’s a case of, “been down so long it looks like up to me.”  But it is a recovery.  Yet, it can still use a boost.  As the Financial Times wrote last week, “in the US, the case for fiscal stimulus is strong.”   

That case is based on what economists call the “output gap.”  An output gap is the difference between the value of everything the economy produces, and what it would produce if it operated at peak efficiency, making the best use of its available labor and productive capacity.   This output gap today is probably 5 to 6 percent of GDP, or a growth shortfall of $770 billion to $930 billion.   That’s why the Federal Reserve continues to keep short-term interest rates near zero, and why global investors have kept U.S. long-term rates at historical lows.

Such a large output gap also helps explain why job growth is so slow.  In the 34 months since U.S. growth first resumed in July 2009, private-sector jobs have increased by just 3 percent.  Compare that to nearly 12 percent gains in private sector jobs in the first 34 month following the deep recession which ended in November 1982.  Part of the reason for much slower job creation this time lies in the “batten down the hatches” response by most middle-class Americans to the destruction of much of their wealth in the housing crash.  However, another part of the reason lies in structural problems evident in the last expansion.  In the first 34 months following the 2001 recession, private sector employment grew by less than 1 percent -- and whatever caused such tepid job creation has not gone away.  

So, the American economy needs today a dose of short-term stimulus plus initiatives to help spur job creation on an on-going basis.  And whatever is done cannot make long-term deficits worse.  The candidate who can solve that puzzle would earn the White House.  

Here are some ideas as a start.  First, shift the tax burden off of job creation and work, with a big, permanent payroll tax cut.  That will reduce what employers pay when they create jobs and what workers and companies pay when people work.  Over the next 10 years, payroll tax revenues for Social Security retirement will average $770 billion per-year.  Cut that in half, and you reduce the tax burdens on job creation and work by some $385 billion per-year.  

The government can raise that kind of money in only three ways – higher income taxes, a new value-added tax, or a new energy tax.  Nobody has ever claimed that higher income taxes or a new VAT help create jobs – but the right energy tax just might do so.

The right energy tax here is a carbon-based fee.  It could be phased in over several years, which combined with lower payroll taxes would give the economy some short-term stimulus targeted to both job creation and consumption.  It could be phased up until it replaced all of the lost payroll tax revenues, ensuring that it wouldn’t make deficits worse over the long-term.  And most Americans would be no worse off with the higher energy prices, because their payroll tax payments would shrink by at least as much.  

Business, including big energy companies, also could come out ahead.  One of the few things that economists, energy experts and environmentalists generally agree on is that a carbon-based tax is the most efficient way to limit climate-warming, greenhouse gases.  That means a broad carbon tax program could preempt future EPA regulation of greenhouse gases – just like the cap-and-trade program that passed the House of Representatives in 2009 did.  

A broad carbon-based tax would make all low-carbon fuels – solar, wind, biomass, and nuclear – more price competitive.  Embed those price changes in an economy as innovative as ours, and entrepreneurial resources and energy would quickly flow into ventures to improve those fuels and make them widely available.  All of those new ventures would create new jobs.   

Finally, we could give this whole process a turbo-charge.   Today, any family or small business can generate its own energy by installing solar panels, as can farmers and larger businesses with larger solar or wind facilities.  And when they generate more energy than they can use, they can sell the excess back to the local utility.  Few families, farmers or businesses do so today, because fossil fuels are still relatively cheap, and the alternatives require hefty initial investments.  

The carbon tax itself will make those fossil fuels less price-competitive, relative to the cleaner alternatives.  Moreover, as Germany and Britain have demonstrated, entrepreneurs will buy and install solar or wind energy for homes and businesses at no charge – so long as government guaranteesw that the utilities will pay a decent rate for the excess power, and the entrepreneurs can get a reasonable cut of those payments.

The mechanism to create those conditions is called a “feed-in tariff,” and Germany and Britain borrowed it from a U.S. program enacted under Jimmy Carter.  It didn’t work here last time, because alternative fuels weren’t sufficiently developed, and oil prices fell sharply in the 1980s and 1990s.  Both of those stumbling blocks no longer apply today.  

In a country as innovative and entrepreneurial as the United States, the combination of a carbon-based tax and a feed-in tariff should drive enormous new investments and advances in renewable energy, with unknown but possibly large-scale economic benefits.  And a widespread dose of decentralized, renewable energy production would create a lot of new jobs just to install and maintain the equipment.

Everybody wins.  The economy gets a short-term boost as taxes on job creation and work go down.  The revenues for social security are replaced with a new arrangement that reduces the risks of climate change, without restrictive new regulation.  Innovation accelerates in areas likely to generate lots of new jobs down the line.  In a sensible political environment, it could be the kind of idea that a smart politician might use to win the presidency.