Commentary: The Republican House leadership is claiming that their tax plan will create 1 million jobs. But whether or not this goal is realistic depends critically on the state of U.S. labor markets and the availability of new workers.
The argument that the Republicans are making is that tax cuts will incentivize business expansion and this, along with the accompanying increase capital investment, will create jobs. The result, the argument goes, is increased employment both by the business and by the businesses suppliers.
As far as it goes, the Republicans are correct, but implicit in the argument is the availability of unemployed workers who can be hired. In the aftermath of an economic turn down, such an assumption is likely correct. But we are not in an economic slowdown, but rather in the middle of a long period of expansion.
Of course, there are always unemployed workers. Some workers are changing careers or perhaps accompanying spouses to new locations. Other workers may want a job but are unqualified for the jobs available. This background level of unemployment that is always present even when there are enough jobs for all qualified workers is called the natural rate of unemployment.
The exact value of the natural rate is uncertain, and it changes over time with technology and demographics; nevertheless, there is a consensus among economist that the natural rate is somewhere around 4.5%. The October unemployment rate is 4.1%. That is, we are right now, as we speak, operating at below the natural rate.
What this means, from the point of view of the employer, they are finding it hard to find qualified workers, so have to resort either to offering higher wages or to hiring less qualified workers. That makes it a great time to be a new college grad. Finding an employer willing to hire an inexperienced, wet behind the ears engineer or marketing major is pretty easy right now. But it also makes it not so great a time to be an employer looking of good help.
Should the Republican plan actually create 1 million jobs as promised, the unemployment rate would have to fall to 3.5%. The last time the unemployment rate was that low was in 1969, which was a very different time—before the advent of the time paycheck family and at the height of the Vietnam War. And it was a time followed by a decade of bad inflation.
So let me make a prediction: the Republican tax plan cannot and will not create 1 million jobs because there are not a million surplus workers to be had. What will happen is that the deficit will balloon. The current estimate is that the tax plan will cost the government $1.5 trillion over ten years. After accounting for the normal growth in the economy, would increase the debt by about 6% of GDP.
The Republican counterargument is that the tax cut will unleash such entrepreneurial fervor that economic growth will wipe away the deficit, new and old. This is nonsensical. We don’t have the workers.
Instead, what we are most likely to experience is the 2% to 3% growth on average, with a recession or maybe two mixed in, which is pretty much what we as a country have experienced over the 150 years. This will be true tax cut or no tax cut. But what a tax cut will do is add to our already large deficit.
Christopher A. Erickson, Ph.D., is interim department head of Economics/Applied Statistics/International Business at NMSU. Chris remembers the Regan tax cuts, the Clinton tax cuts and the Bush tax cuts, none of which delivered what proponents promised. The opinions expressed may not be shared by the administration and regents of NMSU. Chris can be reached at chrerick@nmsu.edu.