Economists Say Tax Cut Deal Won’t Stimulate The Economy Much

December 7, 2010 3:34 a.m.

Democratic Congressional leaders are steamed at President Obama for locking in a deal with Republicans to extend all the Bush tax cuts temporarily. It’s just caving, they say, and it punts the tax cut fight into the next election. But in exchange for agreeing to the extension, Obama got Republicans to agree to a year-long extension of unemployment benefits, and a year-long, two percentage point reduction in the payroll tax, meant to mimic a temporary extension of the tax breaks that were in the stimulus bill. Each of these concessions will inject much-needed demand into the economy. Could this silver lining be bright enough to make the extension of all the cuts worth it?

According to progressive economists, it will help, but won’t make a huge dent.For starters, extending the Bush tax rates don’t provide any additional stimulus — you’d have to lower the rates from their current, Bush-era baseline to generate more stimulus. Letting them expire might have a contractionary impact, but keeping them in place won’t create more stimulus.

Based on his back-of-the-envelope math, Dean Baker of the Center for Economic Policy Research told TPM that a year-long extension of the stimulus tax cuts “should lower the unemployment rate three to four tenths of a percentage point.”

In November, the Economic Policy Institute calculated that the a year-long extension of unemployment benefits would generate 700,000 jobs.

“We find, using the CBO’s methodology, that the $65 billion spent on unemployment insurance extensions through 2011 would support 723,000 full-time equivalent jobs,” wrote Heidi Shierholz and Larry Mishel. “If this program is discontinued, then the economy will lose these jobs.”

With unemployment near 10 percent, “It’s not trivial, but it’s an order of magnitude less than what we should be looking for,” Baker said.

And it doesn’t account for even known unknowns. It’s quite possible that Congress will force significant cuts in discretionary spending next year. “If they do, then that could end up being a net negative,” Baker added.

That makes this plan hard to see as a quiet coup for Obama.

“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,” Mishel said. “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.”

Late update: Paul Krugman isn’t quite sold.

[W]as 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.

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