Okay, tea partiers, is this what you really wanted? Republicans holding middle-class taxpayers and unemployed Americans hostage so the well-to-do get budget-busting tax cuts that will be less efficient in generating jobs than other economic initiatives?
On Monday, the GOPers succeeded in hammering out a compromise with President Obama that will extend the Bush tax cuts for all taxpayers for two years, including the well-to-do. For caving on the tax breaks for the rich, Obama won a 13-month extension of unemployment insurance, a 2-percent payroll tax credit, $40 billion in tax breaks for families and students, and quicker write-offs of business equipment. The deal includes a compromise on the estate tax that is also of benefit to the wealthy. Though Obama yielded on the upper-income tax cuts, he and his White House aides will argue they got a decent deal, given that the unemployment insurance, middle-class-targeted tax credits and other programs add up to about $215 billion for two years, while the tax-cut bonuses for the rich total about $95 billion for two years.
Many on the left will likely jeer Obama for reneging on his vow to oppose continuing the Bush tax cuts for the top brackets. Some on the right will claim congressional GOPers are acting in an un-tea-party manner, with horse-trading that adds hundreds of billions of dollars to the deficit. But at least the rich will be happy.
All politics aside, there is a policy matter at the core of this mud-wrestling match: What's best for the economy?
In his most recent paper
, Mark Zandi, the chief economist at Moody's Analytics (he was a top economic adviser to John McCain during the 2008 campaign) looked at the economic impacts of extending the tax breaks for the upper brackets versus the benefits of extending unemployment insurance. He found that the latter -- which the Republicans have opposed for months -- do much more to boost the economy:
Extending emergency unemployment insurance benefits would provide the most economic bang for the buck, defined as the near-term increase in real GDP per dollar of tax cut or spending increase. Emergency benefits go to those who have been out of work longer than the 26 weeks covered by regular benefits. With more than 40 percent of the 15 million-plus unemployed American workers in this predicament, many families depend on this program to meet daily living expenses.
He adds that "with five unemployed workers for every current job opening (compared with fewer than two in normal times), most jobless workers and their families need the benefits."
Zandi compared two different scenarios: an extension of unemployment benefits coupled with the middle-class tax credits Obama sought and a two-year extension of the upper-income tax credits. With the former, he found, there is 0.4 percent more GDP growth and a 0.4 percent greater drop in the unemployment rate, with 1.1 million more jobs created over a five-year period. And with this package, he calculated, there would be $30 billion less added to the budget deficits over five years.
So it's a no-brainer. Throwing tax cut bonuses at the wealthy is a much less efficient way to juice up the economy -- and the deficit costs are higher. (Zandi supports extending the tax cuts for the rich -- but not because this will have a significant economic impact. He merely thinks it would be better for stability not to mess with those rates.) What the GOPers just won was a victory for politics, not policy -- and not for hard-pressed Americans (and their kids and grandkids who will inherit the deficit costs of these ineffective tax cuts). Obama couldn't figure out how to prevent this.
In his paper, Zandi notes, "The U.S. recovery is at a critical juncture. . . . Until the jobless rate is falling definitively, the recovery will not be securely on track toward a self-sustaining expansion. . . . The Federal Reserve, Congress, and the administration must remain aggressive in their policy support until that happens." But they must support efficient and cost-effective policies, and this deal shows how tough that is.
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