When the federal government intervenes to stimulate the economy, it generally means a big spending program or tax reduction and an increase in the federal deficit. This year we’ve witnessed the largest single-year fiscal policy effort in U.S. history, an effort to aid individuals whose jobs were lost and to stimulate the suddenly depressed economy. The coronavirus lockdowns in most states brought federal legislation enhancing unemployment compensation, one-time support payments to most adults, emergency business “loans” that are largely to be forgiven, and many other elements. The cost of these packages is expected to be about $2.4 trillion. And there will be more legislation this summer intended to stimulate hiring, including a probable infrastructure bill. President Trump still supports what the Administration calls a “hiring subsidy”, which is in fact a payroll tax holiday. As described, it would not explicitly target new hires, but would grant the holiday to all workers regardless of employment status. All these programs will ultimately be quite costly to taxpayers.

But what if there is a way to stimulate hiring without adding a dime to the federal deficit? (And I’m not talking about monetary policy, which inflicts costs of its own.) One inventive idea would create hiring incentives on a contingent basis, but with the beautiful feature that the program itself eliminates the contingency. Alex Tabarrok recently devoted a post to this idea, for which credit goes to Robertas Zubrickas. Here’s how it works, in Zubrickas’ words:

“… 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.”

If enough firms hire in order to reap the subsidies, then aggregate hiring exceeds the threshold and no wage subsidies are paid, but the additional employment boosts demand sufficiently to justify the hiring. Fiscal stimulus without any budget impact! Incredible, right?

There are problems, of course. The simple program described would carry big risks for many businesses. Just because aggregate hiring exceeds the threshold doesn’t mean demand for your firm’s offerings will increase. To take an obvious example, can a rural employer count on an increase in demand? The program could be designed to hinge on different regional hiring thresholds, or different industry hiring thresholds, but that quickly gets complicated.

Moreover, firms will have an incentive to free ride on other businesses who hire up-front. The timing of cash flows would also be critical. Are the subsidies to be paid upon proof of hiring, with repayment later if the aggregate hiring threshold is reached? If not, I suspect many employers would rather scramble to hire workers upon the realization of any increase in demand as might occur, but unwilling to risk hiring given the possibility that the subsidy will be lost and that their own sales will remain weak. That might be especially true for small firms. And if the subsidy is paid up front, good luck getting it back on behalf of taxpayers! So there are substantial fiscal risks, whether or not the aggregate hiring threshold is met. But perhaps those risks could be minimized with some limited tests of such a program.

Finally, this sort of plan would be much less likely to succeed with repetition. Then again, a one-time contingent hiring subsidy might be well suited to the so-called “low-employment equilibrium” that many believe we face today. The contingent subsidy is certainly a market distortion, but one hopes it would be a temporary distortion.

Zubrickas’ contingent wage subsidies are fascinating. The pandemic and the social distancing imperative have increased the cost of doing business, and the infection risk perceived by consumers is a potential drag on demand. Wage subsidies would reduce hiring costs, but if enough firms hire, those costs would be restored while demand would be stronger. But additional sales might not materialize for your firm! Designing a program of this type so as to minimize the risks faced by individual firms and taxpayers is tough, but it is an idea worth exploring in more detail. In concept, it’s certainly preferable to fiscal programs that carry huge costs and usually end in permanently larger government.