One of my biggest disappointments over the past three years is that the intellectual response to the practical failure of discretionary fiscal policy to achieve what its proponents wanted it to achieve hasn’t involved much thinking about how we could do better in the future. The key thing, it seems to me, is to build more automaticity into the system. “Automatic” fiscal stabilizers are great, but we have a huge automatic destabilizer built into the structure of American state and local government. Peter Orszag’s latest column is full of clever ideas on a variety of subjects, but specifically argues on this point that we should index the payroll tax to the unemployment rate.
This has a number of virtues, starting with the fact that the unemployment rate can be measured more accurately on a short time horizon. A cut indexed to rising unemployment and balanced between the employer and employee side would do two things. One it would bolster the incomes of working people at moments when the economy could use a little spending boost. Second, it would decrease the cost of employing workers and thus at the margin discourage layoffs. Employers’ costs would rise again when economic conditions improve. At that point either the underlying business is sound, in which case the cost can be born, or else if the underlying business is unsound and layoffs are unavoidable the people who’ve lost their jobs will be going onto a labor market that features actual job opportunities.