Gullason: 'Ease' sales tax to create jobs

Edward T. Gullason, a professor of economics at Dowling College, is a former staff economist for President Ronald Reagan's Council of Economic Advisers.

America needs jobs. President Barack Obama is continuing to try to drum up support for his American Jobs Act, but it's time to consider a thoroughly out-of-the-box job-creation initiative.

Given that approximately 70 percent of the U.S. economy is driven by consumer spending, and that the fundamental catalyst for job creation is a firm's need to produce more in response to increased demand, a genuinely effective job creation strategy requires consumption stimulation as its centerpiece.

So the Federal Reserve should increase the money supply and distribute the newly created money to states and municipalities solely for the purpose of lowering their sales tax rates -- and they must be restricted from undermining the strategy by increasing other taxes or padding their budgets with new spending.

As a consequence of the sales tax relief, consumption spending will increase -- and jobs will be created. For those unemployed for a substantial period of time, consumption spending will likely increase only modestly. For others, economic research suggests it will increase more. This will be especially true for consumers who are on the fence about buying big-ticket items like refrigerators and automobiles. The opportunity for a price break in the form of lower sales tax rates will push a good number of them into making the purchases.

The logical name for this strategy is QE 3-ST -- "Quantitative Easing, 3 -- Sales Taxes." Its success will be directly related to consumer confidence. Although that's currently low -- on Long Island, it's at its lowest point since 2009, according to a new Siena College Research report -- there's still reason to be optimistic. The "Cash for Clunkers" initiative in the summer of 2009 -- a third cousin of QE 3-ST, but considerably narrower in scope -- also focused on stimulating consumption as the focal job creation catalyst, and it proved successful despite the low level of consumer confidence at the time.

By definition, QE 3-ST would ramp up the money supply yet again. But a strong argument can be made that we continue to have the needed excess capacity to keep inflation at bay. QE 3-ST does not involve further increases in the federal budget deficit or the national debt -- a mandatory litmus test all job creation initiatives must now pass.

Even though QE 3-ST breaks the rules by inappropriately melding monetary and fiscal policy actions -- which means legislation would be necessary to enact it -- many of its features are superior to the job-creation strategies in the American Jobs Act. The proposed infrastructure projects will take time until they are shovel-ready. Plus, they will result in resources being diverted toward the legally required competitive bidding processes associated with them, instead of being routed directly to the construction companies doing the work.

By contrast, QE 3-ST results in more money flowing directly to businesses for more productive ends -- and more quickly.

The direct beneficiaries of the infrastructure projects are construction workers. That's admirable. But what about those who work in restaurants, boutiques and bowling alleys? QE 3-ST's direct beneficiaries are dispersed across a much wider set of industries.

The proposal to extend the employees' payroll tax cuts will only partially reward consumption. Only a portion of this tax saving will be spent. The rest will be used to pay down debt or will be saved. QE 3-ST translates into tax cuts realized exclusively by individuals engaging in the activity that effectively leads to job creation: buying things.

Our jobs crisis has been grinding on for several years now. The components of the American Jobs Act are products of a conventional mindset. It's time instead for a bold initiative that will tap into new ways of conducting monetary and fiscal policies, and that will facilitate the type of job growth we can be truly proud of.