Paying employers to employ?

Check out this article for more details: http://www.nytimes.com/2009/10/07/business/07tax.html?_r=1&partner=rss&emc=rss. In short, there is a proposal gaining traction that would provide a tax credit to employers who choose to employ a person.

Under Keynesian theory, the trick to increases in government spending is not to hand money directly out to people; the trick is to stimulate production, so that the economy comes closer to full employment. A unilateral transfer of money does not necessarily spur increased production; all it does is provide a benefit to the recipient. Government fiscal stimulus should be applied towards the production of goods; it should not be used to provide a tax break to companies.

Why not? If a company gets a tax break, it decreases operating costs (based on decreased wages per worker). This decrease in costs, theoretically, should mean increased investment in capital or employment. However, this is not always the case: as we have seen with the recent bank bailout, the company may retain the stimulus money in order to engage in non-productive behavior, such as purchasing rivals or securing a greater market share. Further, a tax break does not produce anything; it merely lowers the amount of tax revenue collected by the government. Lowering taxes collected has a lower effect on production than direct government consumption through spending.

So, while this is not a bad idea, there are better ideas out there to stimulate the economy. Let's try again, shall we?