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December 31, 2012 9:34 AM Will the Economy Slow With Or Without Fiscal Deal?

By Ed Kilgore

It’s bitterly ironic, given all the alarums about what the markets will do to punish Americans if our representatives don’t reach a big fiscal deal tonight (you get the feeling there’s sentiment to open stock trading on New Year’s Day to hold a festive stock sell-off), that an item that does not even appear to be on the table is the one most likely to damage the economy. Here’s the New York Times’ Nelson Schwartz on this much-ignored subject:

While negotiators in the capital focus on keeping Bush-era tax rates in place for all but the wealthiest Americans, other tax increases are expected to go into effect regardless of what happens in the coming days. For example, a two percentage point jump in payroll taxes for Social Security is all but certain after Jan. 1, a change that will equal an additional $2,000 from the paycheck of a worker earning $100,000 a year.
Many observers initially expected the lower payroll-tax deduction rate of 4.2 percent to be preserved. But in recent weeks, as it became clear that political leaders were prepared to let that rate rise to 6.2 percent, economists reduced their predictions for growth in the first quarter accordingly.
Largely because of this jump in payroll taxes, Nigel Gault, chief United States economist at IHS Global Insight, is halving his prediction for economic growth in the first quarter to 1 percent from an earlier estimate of just over 2 percent. That represents a significant slowdown in economic growth from the third quarter of 2012, when the economy expanded at an annual rate of 3.1 percent.

Makes sense if you think about it for a moment, given the immediate, day-one impact, of an increase in payroll taxes, and their highly regressive nature, which means they most effect the workers most likely to spend whatever income they have.

Now I understand the argument that you don’t want the payroll tax reductions enacted two years ago to remain in place forever, since that would eventually create a solvency problem for Social Security. But if the “holiday” is to end without severe economic damage, we need countervailing fiscal measures to promote consumption, preferably for the working families most effected by the payroll tax boost. “Stimulus,” however, looks to be the very first thing Democrats are willing to give up in a fiscal deal.

It would be especially absurd if a fiscal deal sold as a painful necessity to ward off a recession winds up facilitating one. It’s very important for anyone outside the fever swamps of conservative ideology to understand yet again that economy recovery is far and away the most effective deficit reduction measure imaginable.

UPDATE: I should note that Slate’s Matt Yglesias has been all over this issue for a good while.

Ed Kilgore is a contributing writer to the Washington Monthly. He is managing editor for The Democratic Strategist and a senior fellow at the Progressive Policy Institute. Find him on Twitter: @ed_kilgore.

Comments

  • Josef K on December 31, 2012 9:48 AM:

    Itís very important for anyone outside the fever swamps of conservative ideology to understand yet again that economy recovery is far and away the most effective deficit reduction measure imaginable.

    That would involve actual thought being put into this. It would likewise involve a larger chunk of policymakers actually giving a damn about the economy and ordinary people.

    Neither of those seem in play at the moment. I don't care to think what it will take to get them into play going forward.

  • boatboy_srq on December 31, 2012 9:57 AM:

    There is no "fiscal deal sold as a painful necessity to ward off a recession." There's only the GOTea, who want a full-throttle economic crash just to prove that the New Deal was some sort of mistake, and the Democrats, who can't seem to keep their foot on the Vehicle of State's brakes as it barrels into that crash.

  • golack on December 31, 2012 10:15 AM:

    Extend the employer side of social security taxes to include all income (no cap), and raise the cap a little on the employee side. Outsized bonus for CEO? Social security gets cut via employer payroll tax. Larger pie will also mean lower overall rates while still briinging in more money. Not as stimulating as current holiday, but much better than nothing.

  • c u n d gulag on December 31, 2012 10:25 AM:

    Let me see if I got this right:
    After 12 years of Reagan and Bush (The Not Criminally Insane And Stupid) I, Clinton was told his Presidency depended on lowering the debt a dozen years of Republican idiocy caused.
    And that, unchecked, that deficit was going to eat the country like it was a Super-sized Big Mac meal an escapee from a Fat Farm, ordered.
    Anyone remember the "Deficit Clock" in NYC?

    And then, Clinton lowered the deficit, to the point of nearing a surplus, and all of a sudden, the Oracle Of Greenspan informed us that a surplus was far, far, worse and more dangerous than any deficit - and that we needed to cut the taxes on the richest, or else that surplus would sit and and spoil and fester like a Super-sized Big Mac meal at a Vegan Convention.

    And, now, AFTER 8 years of the worst tax-cutting, torturing, war-starting, people-spying, deficit creating, administration any country north of Central America, East of Asia, and not from Africa, ever had, and that before "Exiting Stage - Far Right," left an economy that was about as stable as a HS Freshman who just downed a bottle of Dad's prized Scotch, after smoked a blunt of Jamaica's best, now, NOW everyone AGAIN is saying that deficits are the worst thing since Satan discarded God's airy wings in a huff, and grew cloven hoofs and a tail, and started exhaling 93 octane breath.

    Or, is the real fear, not that this deficit will be reduced - but, if these tax cuts are allowed to expire, the deficit will be reduced TOO FAST?

    Why do the powers-that-be want us to decrease the deficit?
    Could it be that, eventually, if/when a Republican is elected President, he'll need money to waste on larger tax cuts for the rich, torture, more war-starting, people-spying, and deficit creating, that the next Democratic administration will have to pay - AGAIN?!?!?!

    Usher, can I get a rain-check?
    I've seen this feckin' movie before!