Contingent Wage Subsidies

Robertas Zubricka has a clever idea, Contingent Wage Subsidies. Many macroeconomic problems are caused by a coordination failure–you don’t spend because I’m not spending and vice-versa and so the economy becomes trapped in a low-spending, low-employment equilibrium. Zubrickas shows how to solve these coordination problems. The government announces a contingent wage subsidy, a subsidy that is paid only if hiring is low. If a firm hires and others do not they get the subsidy. If a firm hires and others do hire they get the demand. A no-lose proposition. Hence, all firms hire and the subsidy never has to be paid. Instead of a big push, a zero push! Here’s Zubrickas:

New hiring by one firm is a reason for new hiring by other firms because of employment externalities related to additional aggregate demand, new trading opportunities, or production synergies. Without a coordinated action, however, the virtuous hiring cycle may not start, stranding the economy in a low‐employment, low‐spending equilibrium as in the aftermath of the 2007–2009 financial crisis (OECD, 2016). The traditional approach to this problem emphasizes a “big push,” when one large player like the government spends enough to convince others to spend. In this paper, we show how a “zero push” can achieve the same results.

With the economy in a low‐employment equilibrium, we propose a policy that offers firms wage subsidies for new hires payable only if the total number of new hires made in the economy does not exceed a prespecified threshold. An example would be a promise to cover all new labor costs contingent on that less than, say, 100,000 new jobs are created in total. From a firm’s perspective two outcomes can occur from this policy. One outcome is when the number of new jobs is less than the threshold, in which case the firm has its additional labor costs covered while keeping all the additional revenue. The second outcome is when the threshold is met and no subsidies are paid. The firm then benefits from employment spillovers generated by a substantial increase in total employment which makes hiring profitable even without any subsidies. With hiring profitable in both scenarios and, thus, all firms hiring, the threshold for new hires is reached, bringing the economy to high‐employment equilibrium without any subsidies paid.

Attentive readers will note that the idea has the same structure as my dominant assurance contract (which Zubrickas notes was an inspiration).

Read the whole thing.

Comments

And your jobs for free.

I want my subsidy....

I want your chicks for free.

You can’t always get what you want.

The best best thread ever on MR.

I'm also a cuccold!

I didn't bother to read your paper because your proposal refers to public goods.

Now you support a paper that assumes that a pecuniary externality is a source of market failure. To make things worse, the paper assumes the externality is relevant to something called aggregate demand, so I suggest you talk to Arnold Kling or Richard E. Wagner to know about the irrelevance of such an aggregate.

Contingent on whether another interest group has enough votes to get the money first.

Imagine a world
Where the government spends no money
It's easy if you try

But that's a world with 100% tax rates!

If businesses in the aggregate don't pay consumers to spend consuming, businesses who do hire consumers and pay them to consumer get money from government. With that as the baseline, if other businesses act to get the same government funding by hiring consumers and thus create the same baseline of government payments to consumers, consumer demand drives up GDP triggering a 100% tax on the government payment to pay hiring consumers.

Businesses are now stuck. If they don't accept the 100%% tax and eliminate 100% profits on sales to consumers, they will need to fire all the consumers they hired, which will cut production and thus they will thus fail to sell to consumers because they have no supply, and that means profits fall 100%.

The only solution is for government to pay all labor costs so both businesses hire lots of consumers to produce maximum output to be sold at 100% profit which comes from the government paying businesses to fund consumers buying 100% of target GDP.

Only by government paying 100% of labor costs will profits create jobs.

Does Immortan Joe count as government?

Sounds like a variant of the prisoner's dilemma or a second-price auction. A nice thought experiment that I'd like to learn more about. My instinct though is that this result is for a single turn static game, and would not hold up under a sequential game framework or one where the payoffs are probabilistic.

In a way, again, it sounds like classic Keynes meets pareto. If the multiplier is greater than 1, it should be possible to design a scheme to distribute the gains from the employment-consumption feedback loop while making no one worse off. All well and good, assuming the multiplier is greater than 1.

How often do would we expect to be in the multiplier > 1 situation really, though? If it isn't, then this does the reverse by distorting the economy. Who wanted us to pay more attention to political economy again?

This is indeed a prisoner’s dilemma. It works if everyone participates, but no individual has any incentive to cooperate, and is better off not to.

Suppose I expect this program to work as intended. In that case the economy will get back to normal soon and I can continue my standard business practice of waiting for orders to increase before I hire more workers.

Suppose I expect this program to fail. In that case I should not participate because I will just have to lay people off when the program expires.

There are also cases where the program works for the economy but my orders don’t increase and now I lose big because I don’t get the subsidy.

There are costs to interview people and hire and train them that are probably not covered by the subsidy. There are costs if I make a mistake and hire an unproductive or dishonest person.

So it is best if others participate in this program and I do not.

Therefore this program does not even work in theory, and I expect it would be a big failure in practice. It’s too bad there is no cheap way to test it in an experiment.

"it sounds like classic Keynes"

It's exactly Keynes.

The point of Keynes thought experiment of burying jars of money was not government spending, but to create the incentive for employers to hire miners to mine the jars of money.

FDR did exactly that without the need to figure out how to put jars of money in the ground. He hiked the price of newly mined gold from $20 to $35 the US Tressury would pay for gold. Employment mining gold doubled in less than a year.

Keynes called for policies that caused all savings be paid to workers building capital. The most certain was to sell government bonds to savers and paying businesses to pay workers to build capital such as roads, water and sewer, school buildings, power and electrical grids, and over time repay the bonds with taxes and user fees on businesses and workers to give savers their money back. For example, rural electric and telephone service only breaks even after maybe 30 to 50 years unless the availability of electric and telephone leads to building capital like businesses and houses in rural areas that need electric and telephone and cheap land and labor than in built up cities.

Today, Internet capital is scarce in rural areas so businesses can't be started in rural areas, and often need to shutdown, with moving to dense urban areas with Internet being an iffy proposition. Keynes argued government can jump start investment in rural areas to restore past full employment and increasing it by getting businesses to build more capital, like Internet service. Rural America has universal telephone service by Keynesian policies driving building rural telephone capital in the 30s through 70s by "cheap" government loans. The same is needed to fund paying workers to replace copper with fiber to provide telco services universally, with the debt repaid over 30 to 50 years if no population growth occurs over that time. But the higher consumer spending will drive building more businesses in rural areas which need and pay for telco services over fiber, allowing faster debt repayment.

Today, rural areas are suffering job losses as businesses close for lack of Internet, telcos lose revenue and fire workers cutting local consumer demand, but businesses can't access beyond the local rural market for lack of Internet and food, firing workers and cutting telco revenue, thus more firing, more cuts in consumer demand.

The claim that competition will solve the problem requires magical thinking that Comcast will run copper coax to rural areas where small telcos sold Bellco rural assets going bankrupt due to declining population represent high profit investment opportunity. Ie, poor and getting poorer customers are the ideal customers to generate growing profits.

It will all be satellite in five years. Don't both with fibre to remote areas. There is a reason that Bezos et al invest in delivery vehicles, returnable delivery vehicles and satellites.

I like it. In theory anyway.

As a coordination mechanism it's reminiscent of Vickrey-Clarke-Groves mechanisms where if things work out right, nobody has to actually pay anything but efficient valuation or allocation is achieved.

And it also reminds me of Weitzman's share economy; totally different mechanism but what it has in common is that it can be implemented partially and piecemeal.

I.e. we don't have to calculate what the full optimum is and implement the entire mechanism. We can experiment with smaller amounts or partial payments instead of 100% of additional labor costs.

That partial coverage means there's a real risk that the government might have to fork over the promised reimbursements, but that's okay, the government can calculate the amounts so that it's no worse off than it would've been with an ordinary job subsidy program.

Still, the early comments make good points. We have to be correct that there is a higher employment equilibrium that we can move to, and I have a nagging worry about how well this works in a repeated games scenario.

... this is classic (and totally erroneous) Keynesian framing of national economics: the economy is driven by spending (rather than production) and government intervention (fiscal stimulation of consumption) is the supposed solution.

Complete nonsense, but this is the current and longstanding model of the U.S. and many other modern governments.

How is this really any different than the credit cycle and artificially low interest rates? I agree some of the coordination problem is solved but seems that the actual pattern of demand will not be uniform so you will see growing stocks of output people don't want or growing negative MP labor force.

If Boeing has large layoffs in Seattle and those workers find employment making motorhomes in Iowa, the restaurant owner in Seattle who hires expecting contingent wage subsidies will go out of business because the subsidies don't materialize. Etc. Etc.

To quote Arnold Kling, the economy is not a GDP factory.

I can't help feeling the same result could be achieved in a simpler and more elegant manner. Just cut taxes and regulations for instance.

Even countries without as much in taxes and regulations experience boom and bust cycles. This is a method to minimize the time for the bust cycle. Whereas reducing taxes and regulations would be an enhancement across the board, both boom and bust.

This sounds good in theory. But business owners are very practical people. They won’t hire more people if they don’t have orders for goods or services.

They may fear that their particular business will remain weak while hiring improves across the economy and causes the subsidy to not be paid.

They may fear that the savings rate will go up and people will receive wages but spend as little as possible.

They may fear that their entire industry will remain weak while other industries recover causing the subsidy to not be paid.

I prefer the automatic stabilizers suggested by Claudia Sahm. An increase in unemployment automatically triggers well thought out programs like increased unemployment benefits.

"With the economy in a low‐employment equilibrium, we propose a policy that offers firms wage subsidies for new hires payable only if the total number of new hires made in the economy does not exceed a prespecified threshold. An example would be a promise to cover all new labor costs contingent on that less than, say, 100,000 new jobs are created in total. "

That sounds like a classic very high marginal tax rate. So, firms would seek it out as long as they thought they were well below the threshold, but rehirings might well plummet if the threshold was obviously going to be crossed. So wouldn't it make more sense to have a taper. Maximum amount at less than 100K, but tapers down to 1 million. And perhaps some kind of guarantee credit for the firms that hire first and maintain the new hires for some period of time, maybe one year.

It saddens me to see what America has become. I am glad, however, for having defected to Brazil before things got too ugly to contemplate.

This seems to only work if businesses can be sure that demand post mirrors demand prior.

For instance, suppose you own a restaurant that has a tight floor plan in the business district of a major metropolis (e.g. London). Everyone goes home to Covid and then things look up (vaccine or whatever if you want). You want to rehire if people will come back to the restaurant, but not if the place is going to stay empty.

This proposal means that you hire on the subsidies and then when everyone else, like the drive-throughs and delivery restaurants, you get no subsidies. End of the day there is a decent chance that you eat the wages and do not make back the revenue as consumer demand has shifted.

This will not be unique to restaurants. I suspect there will be at least some shift towards driving vacations and away from destination flights. Likewise, in 2007 we saw major changes even after the recovery in the demand for real estate services and construction.

If we buy any sort of Hayekian tale about malinvestment, this sort of scheme seems highly likely to worsen it. Doomed firms will suck down even more capital and it will take that much longer to clear the books of malinvestment for the new economy. Worse, a number of firms who might have used their limited capital to retool towards a lower wage model will now lose that option and go under.

This seems to be one of those things that works well in a matrix economy with minimal changes or detail, but likely to fail in the real world and to fail hard.

This seems quite annoying for small businesses. You're trying to figure out if you can hire more people, and so you need to figure out your own estimation of the likelihood you get this contingent payment and how it correlates to the economy? It seems like you'd have to make your plans assuming you don't get the contingent payment, which makes the whole contingency thing pointless.

Sometimes I wish that I was more eviler.

I could probably come up with a dozen ways to scam and divert that plan before lunch.

The dynamics would be a huge issue. Given the recent obvious performance of government monopoly agencies on the Covid-19 issue where their incompetence is in full view, I can't see how an agency could make this work. It would evolve into just another system to game by insiders and the politically connected.

This would definitely advantage larger businesses.

If you are a small business contemplating hiring one new worker, you are being asked to bet the store. If you don't get the subsidy or enough new business, you could go under. Odds are, you'd like to keep the store, so not hiring is the safe thing to do.

If you are a big business, it makes sense to hire a few new workers and either get the subsidy or risk a minor cut to one's profit margins if everyone hires and you still don't get enough new business. Odds are a lot of small businesses won't hire and you'll at least get the subsidy.

It's an interesting idea in theory but ignores risk issues and the quantization of labor. In general, I don't get the impression that economists understand risk, and they get handwavy about labor.

Besides the issues others have pointed out, I'd like to mention that the second outcome may not come to realize, period. There may not be any employment spillovers at all, or at least not substantial enough, for all firms, such that they can cover their hiring costs. Though this will probably vary from region to region.

Or get rid of welfare. Everyone works (productive) and spends (consumes).

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