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On the Economy

How will Congress pay for the payroll tax break?

No one can agree, but the break is essential for an economy still in recovery mode

By Jared BernsteinGuest blogger / December 16, 2011

House Speaker John Boehner of Ohio, center, accompanied by fellow Republican leaders, meets with reporters on Capitol Hill in Washington, before a crucial vote on a GOP effort to renew an extension of the payroll-tax cut. According to Bernstein, Congress can't agree on how to pay for the payroll tax cut extension.

J. Scott Applewhite/AP

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I can’t bear to take you through the details of the current Congressional scrum.   It’s another case of the new normal for this group, futzing around until the last minute, then jamming through some sort of patch that will hold things together until the next dysfunctional episode.

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I will say this, however.  Apparently, since they can’t agree on how to pay for a full year of extending the payroll tax break and Unemployment Insurance, they’re considering a two-month extension.

First of all, and I know that this is political sacrilege right now, but the smart thing to do is to not worry about a payfor.  Yes, that means a higher budget deficit for 2012 but that’s okay for at least four reasons:

–the economy in general and the job market in particular is still very much recovering from the recession and needs the temporary lift;

–by dint of being temporary, the $175 billion or so of spending on another year of these two programs will have almost no impact of the longer term deficit (e.g., the $800 bn Recovery Act is expected to add 0.4% of GDP to the 2012  budget deficit);

–any payfors that start “too soon” would of course counteract the stimulus from payroll and UI;

–borrowing costs are very low; interestingly, market mechanisms, nudged by the Fed, are working as they should to keep interest rates low right now; it’s just that politics is preventing us from tapping this mechanism as part of the solution.

Second, there’s this: congressional conservatives have consistently complained about the uncertainty created by today’s economic policy.  But by blocking a clean, year-long extension of UI, they’re needlessly creating exactly that—uncertainty and insecurity for working families struggling with joblessness.

OK–political hypocrisy ain’t a newsflash.  They’re still trying to hammer out a longer extension, so stay tuned.

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