So the tax deal is out. Obama extracted some concessions, with the big surprise being a payroll tax cut. How much better do these concessions make the thing? …[T]his raises GDP by 0.7 percent relative to otherwise; rule of thumb is that one point on GDP is half a point on unemployment, so add 0.35 points to the CBO numbers.
That’s a two-year average; what about timing? Both the payroll tax break and the unemployment extension are for the first year only. So, a bigger boost next year, fading out in 2012. Since all the evidence says that elections depend on the rate of change of unemployment, not its level, this is actually bad news for Obama: he’s setting himself up for an economic stall in the months leading into the 2012 election.
Oh, and he’s overpromising again:
“It’s not perfect, but this compromise is an essential step on the road to recovery,” Mr. Obama said. “It will stop middle-class taxes from going up. It will spur our private sector to create millions of new jobs, and add momentum that our economy badly needs.”
Millions of new jobs? Millions? Not by my arithmetic.
So, was this worth it? I’d still say no, although it’s better than what I expected over the weekend. It still greatly increases the chances of the Bush tax cuts being made permanent — especially because the front-loading of the stimulative stuff actually worsens Obama’s 2012 electoral prospects.
Overall, enough sweetener has been added to diminish, but not eliminate, the bitterness of the disappointment.
A further thought on the tax deal: didn’t the administration repeat exactly the same mistake it made on the original stimulus? The stimulus was too small; but it also too short-lived, with the maximum impact on growth coming in the winter of 2009-2010, then turning negative just in time for the midterm election.
Now we have unemployment insurance and payroll tax cuts for 2011, going away in 2012 — just in time to put the administration in big trouble as the election looms.
This only makes sense if you believe we’ll be in a self-sustaining, strong recovery by late 2011. Stranger things have happened, but …
And remember, mistaken forecasts of self-sustaining recovery taking hold were a big part of the original stimulus mistake.
I am generally pleased with the compromise over taxes the President and Republicans struck yesterday. (The President should be too, but he seemed dejected at his news conference. Buck up, Mr President! You don’t want anyone to start thinking of the word “malaise.”) …
As the policy was described yesterday, this payroll tax cut goes entirely to the worker. This increases work incentives, but the main motivation is probably to increase take-home pay, consumer spending, and aggregate demand. CEA chair Austan Goolsbee recently said, “We’re not saying that our long-term recovery ought to be built on trying to increase consumer spending.” Maybe not, but the plans for short-run recovery are very definitely consumption-based.
An alternative would have been to reduce the employer’s share of the payroll tax, at least to some degree. Given a sticky wage, this policy would have reduced the cost of hiring and, to the extent labor demand curves slope downward, increased employment. It would also have increased business cash-flow and, to the extent that firms are cash-constrained, increased business investment.
I should note that, as part of the deal, the President also got his proposal to allow businesses to expense investment spending. As I have said previously, this is a good idea, but the impact is likely to be modest.
On policy grounds, I’m not happy about President Obama’s decision to go along with a two-year extension of the Bush tax cuts for those making over a million dollars a year and with a scaled-back estate tax. But there’s an economic and political logic to it.
Economic: The most important thing our federal government can do at the moment is to help the economy. Fiscal policy options are limited; there’s no chance of a second stimulus package. Extending the tax breaks for the richest will help — not a lot, since much of the money the rich get to keep will be saved rather than spent, but a little. More important, in exchange the administration got an extension of unemployment benefits for several million people and additional tax reductions for low- and middle-income Americans.
Political: The general line of commentary on the left suggests that compromising with Republicans on this issue hurts Obama politically. Comparisons to Jimmy Carter are becoming commonplace. But Bill Clinton got the same kind of flak. In the end, the key difference between the Carter and Clinton presidencies wasn’t clarity of vision, a big idea, decisiveness, toughness, progressiveness, or partisanship. It was how the economy performed as each approached reelection. If our economy gets back on its feet, President Obama and his party are likely to fare well in the 2012 elections, and images of Obama as Carter redux will be a distant memory.
…In this imperfect political world, the agreement to temporarily extend all of the Bush tax cuts, extend unemployment insurance, and temporarily reduce payroll tax rates and allow enhanced business expensing looks like a pretty good outcome for the American economy. The sharp criticisms levied at it by both the Democrat base and the country’s real deficit hawks are both overstated. …
[End of update.]
Most of this round of stimulus does look to be relatively low bang-for-buck, and it is not paid for over ten years, but it does look to me as though it is better than a poke in the eye with a sharp stick.
It is important to realize that most of the money in this package is maintaining tax cuts in place that were scheduled to expire. This will prevent tax increases from having a contractionary impact on the economy, however there is very little, if any, net stimulus in this package compared with current levels of taxation and spending.
Larry Mishel of the EPI:
Who got what out of the deal is clear. The Republicans got tax cuts for the best-off two percent and lower estate taxes for the very wealthiest families, neither of which will do much if anything to create jobs.
President Obama won policies that will put or keep money in the pockets of the families of the unemployed and middle and low-income families, which will increase spending and create jobs. That’s what a payroll tax holiday for workers, unemployment benefits and the various tax credits will do: create customers for business and create jobs, which is our biggest need right now.
In two years, the American people will have a clear choice about who the tax code will favor. That debate will, I hope, highlight the hypocrisy of those wanting to deepen the deficit by extending tax cuts for the rich while simultaneously cutting health care, Social Security and domestic public investments in the name of deficit reduction.
So is this a good deal? It’s a lot better than I would’ve told you the White House was going to get if you’d asked me a week ago. There’s some new stimulus in the form of the payroll-tax cut and the expensing proposals. The older stimulus programs that are getting extended — notably the unemployment insurance and the tax credits — probably would’ve expired outside of this deal. The tax cuts for income over $250,000 are a bad way to spend $100 billion or so, and the estate tax deal is really noxious.
It’s bad news for the deficit, though the White House and Congress are right to make the deficit less of a priority than economic recovery. And speaking of that economic recovery? This isn’t enough, and it’s not well targeted. The … end result is between $200 and $300 billion more in tax breaks, tax credits and unemployment insurance than there would’ve been if not for this deal… That’s better than nothing — or to be more specific, better than backsliding.
Most of the money just keeps programs that are currently in effect from expiring, so in some ways, it would be more accurate to say that this money is anti-contractionary rather than stimulative. It’s important that the White House doesn’t repeat the mistake it made in the original stimulus and overpromise how much this will do for the economy. …
And finally, it’s something of a hopeful sign: The White House sat in a room with Republicans and Democrats and managed to negotiate an actual compromise. The final deal includes some things that Democrats will like and some things they won’t like, and it includes some things Republicans will like and some things they won’t like. But it’s a deal, and … if you want to be optimistic, this process suggests that the next two years might be a bit more productive than some of us have been predicting.
Maynard at Creative Destruction has the optimist’s take on the reported tax cut deal:
[T]he deal supposedly struck between Obama and the Republicans is not too bad and better than was to be expected. We give the rich about $60 billion a year, and in return get about as much economic stimulus, focused on low- and moderate-income people, as we could hope to get.
…I tend to agree. …
The outlines of the tax-cut negotiations have finally come into focus: basically, it’s a kitchen-sink approach where Republicans and Democrats all get the tax cuts they want. The Bush tax cuts get extended for people earning more than $250,000 a year — and unemployment insurance gets extended, along with various tax credits. On top of that, there’s a 2% cut in payroll taxes, and the reintroduction of the estate tax at the Republicans’ preferred level: 35% of estates over $5 million. There’s even a nice new tax deduction for businesses making new investments. This is tax cutting, Oprah-style: you get a tax cut! And you get a tax cut! And you! And you! You all get a tax cut!
This is clearly a win for the Republicans, who get everything they want for the rich. … Meanwhile, all the Congressional opposition to this deal is going to come from Democrats, who are basically being asked to sign off on exactly the same bill that George W Bush would have asked for, with a spoonful of unemployment-benefit sugar to help the medicine go down. …
The estate tax and the extension of high end tax cuts are causing the most heated reactions, and the payroll tax cut is generally being applauded. But I see the payroll tax reduction as potentially troublesome as well. Though the revenue the Social Security system loses due to the tax cut will be backfilled from general revenues, the worry is that the tax cut will not expire as scheduled — temporary tax cuts have a way of turning permanent. That’s especially true in this case since labor markets are very unlikely to recover within the next year and it will be easy to argue against the scheduled “tax increase” for workers. In fact, it will never be a good time to increase taxes on workers and if the tax cut is extended once, as it’s likely to be, it will be hard to ever increase it back to where it was. That endangers Social Security funding — relying on general revenue transfers sets the system up for cuts down the road — and for that reason I would have preferred that this be enacted in a way that produces the same outcome, but has different political optics. That is, leave the payroll tax at 6% on the books and keep sending the money to Social Security, and fund a 2% tax “rebate” out of general revenues. The rebate would come, technically, as a payment from general revenues rather than through a cut in the payroll tax, but in the end the effect would be identical. But the technicality is important since it preserves the existing funding mechanism for Social Security even if the taxes are permanently extended.
Originally published at Economist’s View and reproduced here with permission.
Opinions and comments on RGE EconoMonitors do not necessarily reflect the views of Roubini Global Economics, LLC, which encourages a free-ranging debate among its own analysts and our EconoMonitor community. RGE takes no responsibility for verifying the accuracy of any opinions expressed by outside contributors. We encourage cross-linking but must insist that no forwarding, reprinting, republication or any other redistribution of RGE content is permissible without expressed consent of RGE.