Job Creation, Payroll-tax Leniency May Aid Economy

William Drayton is board chairman of Get America Working!, a nonpartisan, nonprofit policy group that seeks to create jobs through structural changes in the U.S. economy.

Many analysts view the news of spiking unemployment as evidence that the economy is in recession. They talk about a "perfect storm" of rising unemployment, anemic growth and inflation pressure, on top of the housing and credit crises.

But the metaphor fits imperfectly. "Storms" are cyclical, followed by clearing. Our current extreme economic weather is not the usual fluctuation of the business cycle; it's a structural disturbance.

"Climate change" might be a better analogy.

After eight consecutive months of job decline, we've lost more than 600,000 jobs nationally so far this year. Though Long Island hasn't seen a net loss in jobs yet, its employment growth has been almost nonexistent, and its unemployment rate for July set a five-year high at 5 percent.

At the same time, the nation has witnessed the biggest producer price index jump in 27 years and the highest consumer price inflation in 17 years, effectively cutting 2008 real wages 3.1 percent. Amid the worst housing slump since the 1930s, banks repossessed almost three times as many homes in July as a year ago, and some disturbingly credible analysts say more major and regional banks are at risk.

We are treating these problems symptomatically by throwing lots of money at them: rebate checks to fuel consumption, billions from the Federal Reserve for shaky financial firms, $300 billion for foreclosure relief for a few and, now, up to $200 billion to rescue Fannie Mae and Freddie Mac.

But notice that none of this spending creates jobs - the one big, structural thing we can do to change the game. People are our chief untapped resource, indeed the only big one left. Giving more Americans the opportunity to work is a political win that more than pays for itself. We need to deal with the other symptoms, too, but job creation should be job one.

Today's rising unemployment is part of a much bigger, older pattern of neglecting job growth, which is a structural cause of our current trouble. In the past seven years the United States produced only 6 million new jobs, not nearly enough to accommodate population growth.

For many years, we have tried to sustain consumer spending through debt and inflated home equity. The result: ever mounting debt and ever shrinking percentages of Americans working. Official unemployment jumped last month to 6.1 percent - nominally 9.4 million people. But that includes only those who actively looked for a job in the past 30 days. Those who already gave up, those who would work if a decent job were available but can't find one, aren't counted.

If we did count them - seniors regretting retirement; parents who can't find flexible jobs; young adults without job experience or prospects; laid-off manufacturing workers who won't flip burgers; as well as minorities, immigrants, people with disabilities and many women suffering from chronically high unemployment rates - the true number of jobless would be roughly 70 million.

Consider what would happen if all of them had jobs. It would structurally and sharply increase growth, relieve the government and families from supporting tens of millions of dependents, and slash social costs ranging from unmotivated students to drugs and violent crime.

While U.S. policy has failed to address job creation seriously for a long time, Europe has made it a priority and cut unemployment to levels not seen in decades. Governments from Sweden to France accomplished this by cutting their payroll taxes, which lowers labor costs, making it easier for companies to hire. Studies show that countries with payroll tax rates at 40 percent employ 11.5 percent fewer people than countries with payroll tax rates below 30 percent.

America should cut its payroll taxes, too. Now the biggest tax for more than 80 percent of the population, payroll taxes have grown from 1 percent to almost 40 percent of federal revenue. They increase the cost of hiring more than 16 percent - a giant, perverse, job-killing price signal shouting, "Don't hire!"

Suppose we reversed that price signal and actually encouraged hiring. If we dropped payroll taxation and replaced the lost revenue with taxes on consumption of natural resources - energy, materials, pollution - we would, after an adjustment period, create roughly 40 million new jobs. We would also create incentives for conserving energy and natural resources, while tapping underutilized labor.

Such a market-driven approach would be equally welcome to liberals and conservatives. Al Gore, T. Boone Pickens and many others advocate cutting payroll taxes and instituting energy taxes to boost growth and energy independence.

Admittedly, it would require a departure from the hidebound third-rail politics of financing Social Security (touch it and you die). But the "perfect storm" now looming, along with the threat of real climate change, might motivate us sufficiently to finally make the break. That would be its silver lining.