Obama's disco-era jobs bill

WASHINGTON (Fortune) -- The ghost of Jimmy Carter's one-term presidency is hovering over President Obama as the Democrats try to pass a jobs bill in time for this year's elections. So why is the centerpiece of the measure -- a tax break for companies that make new hires -- a play straight from Carter's economic policy circa 1977?

Then, as now, the economy looked anemic and unemployment was high: 7.8% when Carter entered office, compared with 9.7% now. So just eleven days after his inauguration, the president proposed giving companies a temporary tax break if they hired new employees, calling it the New Jobs Tax Credit. The law went into effect for 1977 and 1978, over which time the unemployment rate fell 2%.

A success, right? Economists today are divided, and their reasons get at the heart of the current jobs bill debate. The goal of any jobs tax credit is to spur a company to hire when it otherwise wouldn't. The trouble is, it's impossible to distinguish exactly which companies have plans to hire anyway. Lawmakers can only do their best to design a bill with the right incentives.

Critics of Carter's plan -- and Congress' now -- say that the problem with any jobs credit is the potential for waste. It's estimated that of the companies that claimed the tax credit under Carter's plan, two-thirds would have hired those employees regardless of the tax break.

"It's a windfall for companies that want to expand anyway," says Rea Hederman, a senior policy analyst at the Heritage Foundation. Should the bill pass, Hederman says the big beneficiaries of the tax credit this time around would be companies in the big-growth areas of health care and education.

Another problem with the 1977-78 effort is that many companies, especially small businesses, didn't even know about the tax credit. A survey by the National Federation of Independent Business found that only 43% of their members knew of the law in January 1978.

Meanwhile bigger companies were, and still are, better-equipped to take advantage of the tax breaks because their armies of accountants can keep up with the complex changes. (Never mind that the law behind the 1970s tax credit was called the Tax Reduction and Simplification Act.)

Even if some of the tax credit goes to waste -- which is inevitable -- some economists point out that the incentive will still produce some jobs, which is better than none at all. Economist Timothy Bartik, who is an expert on Carter's New Jobs Tax Credit, estimates that Obama's $30 billion proposal would create at least one million jobs, with each one costing less than $30,000. Compare that to the stimulus from last fall, which produced one job for every $100,000 spent, according to the president's Council of Economic Advisors. "The issue is, what is the bang for the buck?" says Bartik.

Unfortunately everyone agrees the latest version of the jobs bill on the Hill isn't going to do much. Bartik estimates that with its $13 billion price tag, the law would create 350,000 jobs at best -- a drop in the bucket compared with the over eight million jobs lost since the end of 2007.

Regardless of its size, the bill also has some serious design flaws. The proposal last week from Max Baucus (D-Montana) and Chuck Grassley (R-Iowa) includes a requirement that in order to qualify for the tax break, an employer has to hire someone who has been out of work for at least 60 days.

"It shouldn't matter whether the person you're hiring was unemployed for 60 days or 20 days. You just want companies to hire the the best people they can," says Howard Gleckman, a senior research associate at the Urban Institute and editor of TaxVox, the center's tax and budget policy blog. "The more constraints you put on companies the less likely they're going to do it."

There were flaws too in Carter's New Jobs Tax Credit, yet no one really knows how employment would have fared without it. As a 1986 report from the Treasury points out, the economic recovery was already under way when the NJTC went into effect.

In both 1976 and 1977, real GDP grew by 5% each year. The tax credit expired in December 1978, and by 1980 unemployment rose again to 7.7%. But there were other factors pressuring jobs: Oil prices were doubling after the Iranian Revolution, and Paul Volcker at the Federal Reserve was starting to tighten monetary policy.

The real lesson from Carter's experiment in tax breaks -- whether you view it as a failure or a success -- is that any plan has to be thoughtfully executed. "The question is, do we want to have a job creation package that actually creates a substantial number of jobs?" says Bartik. "To do that you have to have tax credits that are big enough and well-designed enough that you can do it." The bad news is that almost 30 years later, Congress isn't doing either.