Editorial: How to create jobs in San Francisco

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If Newsom decides to solve the city's $520 million deficit with cuts alone, he will be taking more than $1 billion out of the local gross domestic product

EDITORIAL If Mayor Gavin Newsom is serious about stimulating the San Francisco economy, he ought to start with a basic number that the city's own economist, Ted Egan, passed along to us this week. The number is 2.11 — and Egan says that's the multiplier effect of cuts in local public spending.
In other words, every dollar Newsom cuts from the city budget has a ripple effect of taking $2.11 out of the San Francisco economy. Which means that if the mayor decides to solve the city's $520 million deficit with cuts alone, he'll be taking more than $1 billion out of the local gross domestic product.
And that, in a nutshell, is the problem with the mayor's economic stimulus package: it's entirely aimed at the private sector, with no regard for how it will hit public spending.
A dose of reality here — public-sector jobs are also jobs. People who work in the public sector pay rent and mortgages and buy clothes and food for their kids and go shopping in local stores and go to local clubs and restaurants and pay taxes — and have the same economic impacts on the economy as private-sector workers. If you lay off nurses and recreation directors, those people stop spending money in town, and you continue the vicious cycle that has made this recession so deep and painful.
And if your entire economic stimulus program is aimed at cutting private sector taxes, it's going to lead to public sector job losses. And those losses will undermine much of the impact of any gains you might get from private sector job growth.
Egan predicts that Newsom's program of eliminating the payroll tax for new hires would create 4,330 new jobs in the city. We find that something of a stretch — it's hard to imagine how any struggling small business would find eliminating a small tax enough reason to hire a new worker, and small businesses provide the vast majority of the private-sector jobs in San Francisco. But even if it's accurate, it's a fairly tiny gain. The city's lost more than 35,000 jobs since 2007, and when the economy rebounds in the next two years, Egan predicts about 20,000 new jobs in the city even without the stimulus.
Egan also acknowledged to us last year that "the consensus among economists is that most of the time government spending stimulates the economy more" [than tax cuts]."
That's particularly true in a city where the largest employers are all in the public sector (see opinion piece this page).
If the mayor and the supervisors actually want to create jobs in San Francisco, there are plenty of things they can do — starting with finding ways to close as much of the budget gap as possible without layoffs. Here are some possible approaches.
• Put a major revenue measure on the November ballot that saves city jobs without costing private sector jobs. There are several ways to do this, but all of them start with the well-demonstrated concept that transferring wealth from the rich to the poor and middle-class — that is, giving money to people most likely to spend it — is good for job creation. One option: shift the payroll tax to a gross receipts tax and charge bigger companies a higher rate. Another: a commuter tax on income earned above $50,000 a year would charge wealthier people who use city services and don't pay for them.
• Issue infrastructure bonds. The notion that cities can't borrow money the way the federal government does to fund economic stimulus programs is just wrong. San Francisco can sell bonds for a wide range of projects, from affordable housing to alternative energy projects to public works programs that are badly needed and could put San Franciscans directly to work. But it can't be small-time projects; to make a difference, direct stimulus needs to be big, perhaps $1 billion. San Francisco's property owners, who ultimately are on the hook for the bonds, are by and large (thanks to Prop. 13) entirely able to handle more payments.
• Lend more money to small businesses. The biggest obstacle to small business hiring isn't taxes but a lack of credit. The $73 million Newsom is going to spend on tax cuts would create far more jobs as part of a city-sponsored microloan fund. Newsom's efforts on that front are still very small scale.
There's so much more the city can do — but cutting taxes and losing city jobs is the wrong way to turn around the economy.

Comments

Bruce,

Some pretty good points here. I agree 100% that eliminating the payroll tax for new hires isn't a big enough incentive for a small business to expand in this economic climate. However, the City/Federal JOBS Now program is. JOBS Now reimburses 100% of wages (through 9/30/10) to employers large and small for hiring qualified individuals through the City's Human Services Agency.

One catch is that employers may not see that first reimbursement check for 60-90 days after hiring a qualified employee. I am in a situation where I am likely to be putting up cash for four to six pay periods before seeing checks from the program begin to come back to me. That's somewhere in the $10-$15K range, a big dent on cash flow.

A microloan from the City (with my pending Federal funds as collateral) would be welcome, and would provide incentive for me to hire further and expand my business.

Posted by Bradley Vaccaro on Feb. 16, 2010 @ 2:46 pm

I think the proposal to float infrastructure bonds might be a viable "local stimulus;" however, the city does need to keep an eye on how much long-term debt it takes on. If a municipality (or a state, such as California) takes on too much debt, then down the road, a large portion of the budget gets tied up just paying back interest. Nonetheless, infrastructure bonds would generate jobs quickly and leave the city with lasting long-term capital improvements.

As for raising taxes on "big businesses," I hear this line often floated in San Francisco. However, people must surely be aware that "big businesses" are in the best position to leave San Francisco and take their jobs and tax revenue with them. Several major and mid-sized businesses have long ago fled the city. There is no reason for any big or mid-sized business to be located in San Francisco--the city is not New York or LA where certain industries are centered. San Jose and its suburbs, not San Francisco, are the heart of Silicon Valley; therefore, San Francisco cannot really lay claim to being a place a business "has to be." Even if a business wants to have a presence in the Bay Area close to the city, there are several desirable business centers with quality commercial space and convenient highway and public transit (BART and Caltrain in the South Bay). A "big business" would have no problem picking up and moving to the major business center in Walnut Creek (and many have), or even to the closer East Bay business nodes in Oakland/Emeryville, etc.

A very modest tax increase by SF would probably be tolerated by most businesses, but a more robust tax increase and businesses will gladly say "adios!" The 2009 fourth quarter office vacancy rate for downtown SF was 14.7%, and for the traditional Financial District proper it was 12.9%. While these vacancy rates aren't terribly out-of-line with other major business centers and even better than some of the major suburban markets, they do show that demand for city office space where the "big businesses" are typically located is not inelastic. It is very much affected by the current recession, and adding additional costs to doing business in San Francisco will simply drive more businesses away, especially when now more than ever there are is so much affordable Class-A space available in the suburbs near amenities, near transit, and near where many well-educated and skilled individuals already live.

Once the City's tax base is further eroded, who ends up paying for the costs of running SF? We all know the answer. I firmly believe that businesses should pay adequate taxes, fees, etc., and for the most part, they do. Raising taxes is a very fine balancing act. At some point, the costs of being in a certain location outweigh the benefits and businesses move away. Several businesses formerly located in SF reached their tolerance threshold, and I am not quite sure certain people realize how close so many other businesses are to reaching the tipping point.

Posted by Chris on Feb. 17, 2010 @ 1:16 am

Taxes typically aren't a major factor in where businesses locate or whether they stay. That's a myth. Taxes are such a small part of the cost of operating most businesses that they're dwarfed by, say, the cost of office space and the cost of labor. San Francisco has an excellent, educated labor pool, access to an international airport, is a desirable place for CEO's to live (which actually IS high on the list of priorities businesses use in making decisions) and has lots of other advantages. I'm just saying make the taxes fair -- the biger players can afford to pay more -- and small businesses create most of the jobs, anyway.

Posted by Tim Redmond on Feb. 17, 2010 @ 12:49 pm