The scheduled expiration of stimulative payroll tax cuts: It’s the worst policy idea in America today and it’s coming to destroy the economy early next year.
With deficits low and unemployment high, tax increases in general are ill-advised. But raising a broad-based, mildly regressive tax is particularly damaging because it will particularly impact the bottom lines of precisely the kind of credit-constrained households who we have to be targeting with fiscal policy. And this tax hike is bad demand-side policy that’s also bad supply-side policy—a tax on work that will moderately discourage employment alongside crunching demand. And the most shocking thing about it is that nobody in congress seems very interested in doing anything about it.
Jan Hatzius, chief economist at Goldman Sahcs, is rightly appalled:
We are surprised that neither party has seriously challenged the case for near-term fiscal retrenchment. In particular, the expiration of the $126bn payroll tax cut (1% of disposable income) is almost universally accepted. This expiration alone is likely to shave 0.6 percentage point from 2012 growth on a Q4/Q4 basis—the same order of magnitude as the estimated boost from QE3—at a time when investors are lining up to finance US government expenditure at a real 10-year yield of -0.8%. While we agree that the US government will ultimately need to tighten its belt, a big move in a restrictive direction still looks decidedly premature to us.
As he notes there’s other damaging fiscal policy in the pipeline but you can at least understand what the partisan gridlock is all about. The payroll tax cut expiration, by contrast, is both particularly harmful and not really conducive to anyone’s long-term agenda. Clearing this up ought to be the first order of business for a lame duck congress, but instead of pushing for it the drive in DC is to get congress to focus on another round of grand bargaineering. This interest in the completely abstract question of long-term budget math at a time when short-term fiscal contraction is one of the biggest risks to the economy out there is infuriating.