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Why Temporary Fixes Aren’t Fixes at All

11:08 AM, Jun 27, 2011 • By JIM PREVOR
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In other words, like a drug-induced high, with a low sure to follow, this proposal is a disaster waiting to happen. It promises a short-term interlude, followed by a day of reckoning. We probably can’t afford to give everyone a big raise on January 1, 2013, and we don’t want the morale problems, the expense and the hassles that come with firing people. So we won’t rush to hire. If prudent businesspeople will hold back, this means the policy will never produce the bang for the buck predicted in the macroeconomic models…or by Professor Frank.

There is another problem with a policy proposal such as this. Its manifest unfairness will scare many businesspeople into thinking they better hold onto their money. Why is it unfair? Most of the time, we speak about the political process protecting existing companies and interest groups. Yet, in this case, a decision to exempt new hires but not existing employees from the employer contribution to social security is a decision to advantage new or fast growing competitors over existing businesses.

Professor Frank is not very specific on this proposal. Presumably the plan would exempt companies from paying payroll taxes on hires above an existing base number to prevent companies from firing people so as to hire new employees cheaper.

Yet this kind of plan would mean that a solid business, say a local store that has 10 longtime employees, could be thrust into competition with a start-up or expanding business that gets a big advantage on labor costs. There is no reason the government should want this long-established store to close just so some newcomer can open across the street.

One wishes there was some indication that Professor Frank or policymakers who push these macroeconomic modeled programs had thought at all about the way an entrepreneur, confronted with the prospect of his business being disadvantaged by such a federal policy, could easily come to the conclusion that his goal should be to stop reinvesting, not to start new ventures, and to pull out money where he can. A whole society can come to start thinking that government policy is too arbitrary and that it makes building a business too risky.

Thus the all too clever machinations of brilliant policymakers can purchase a little short-term stimulus at the cost of the death of American entrepreneurialism. And the oh-so-smart experts, who know little of human motivation and fear, will stand befuddled wondering why the model didn’t work.

Jim Prevor is founder and CEO of Phoenix Media Network, Inc.

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