The Payroll Tax Cut Extension - GOP holds recovery hostage

Be careful where you point your gun...

Economist Mark Thoma on what is at stake with the payroll tax and unemployment insurance extensions, which the GOP is determined either to halt or to hold hostage by linking to unrelated legislation that the President has vowed to veto: 

Congress has not been able to agree on extending the payroll tax cut, and as it stands, payroll taxes will increase in January. What impact will this gridlock have on the economy? What about the expiration of unemployment benefits, another effect of the failure to produce legislation on the payroll tax cut?

The payroll tax cut amounts to around $1,000 per year for the typical household, which adds up to a around $120 billion per year in additional purchasing power for the total workforce. If the payroll tax cut is not extended when Congress reconvenes, losing that much purchasing power would make an already slow recovery even slower...

To give some idea of the size of the impact, the approximately 800 billion dollar stimulus package was spread over two years, and this would be more than a quarter of the per-year stimulus…

The expiration of unemployment insurance is also worrisome. This has both a short-run and a long-run impact. In the short-run, it takes purchasing power away from unemployed workers, and the resulting fall in demand won't help the economy or the unemployed. It also promotes less efficient matching between workers and jobs, which has negative effects on economic growth in the longer run…

If the Republicans succeed, 2 million people will stop getting checks, which average about $296 a week, in January. Another 5 million will lose benefits over the course of the year. All told, that would be a loss in purchasing power of $44 billion according to the CBO, and would put yet another drag on the economy.

The economy remains on shaky legs, and the combined impact of an increase in payroll taxes, a reduction in unemployment benefits, and the coming austerity measures as we begin dealing with the long-term debt issue could put a substantial drag on the already too slow recovery. We need to get the economy back on solid footing first, then tackle our long-run debt problem. But getting the order wrong and imposing austerity measures before the economy is ready is, as Europe is learning the hard way, counterproductive.