Just Extend The Damn Payroll Tax Cut

The deadlock between House Republicans and the Senators of both parties about whether to approve a two-month extension of payroll tax cuts, and the larger disagreement between Democrats and Republicans about how to pay for a longer-term extension, has become the political story in Washington. You can see all kinds of arguments about who’ll win and who’ll lose, about the implications for the 2012 presidential race and the congressional elections, etc. A bit lost in this is the basic economic policy question where, as Josh Barro conservative in fairly good standing, argues “The House should pass the Senate bill, and then House and Senate members should get together in early January to work out a full-year extension for both policies as quickly as possible – and they shouldn’t worry about ‘paying for’ it.”

I wrote about this a couple of weeks ago now but there’s no reason to be worrying about paying for this tax cut when interest rates are low and investors are clamoring for US bonds as a safe harbor from the storms of Europe. The only thing worth debating about the payroll tax is whether or not a cut will be economically beneficial, and there seems to be broad congressional agreement about this. A cut will bolster real disposable income and at the margin reduce unit labor costs in a way that doesn’t prompt a debt-deflation problem. Congressional Republicans are seemingly allergic to taking yes for an answer from Obama so we’ve had to tack on some extra disagreements just to prevent this from getting resolved.

On Unemployment Insurance there is some real debate among researchers and members of congress about the balance between income-bolstering impacts and work disincentives. But I think it’s common sense to say that the time to start curtailing UI eligibility is when the unemployment rate has fallen closer to its “natural” level.