Advancing a Free Society

A Shame the Republicans Must Let Politics Trump Economics

Thursday, February 16, 2012

The extension of the payroll tax holiday is bad economics. It may be good politics, or avoid a bad political outcome.

Economists know that temporary tax breaks have little or no effect on aggregate demand. Reducing payroll taxes for the rest of the year only increases the unfunded liability of social security and increases uncertainty. The net effect on growth and employment of extending the payroll tax reduction is likely to be negative. It is bad economics to all but die hard Keynesians.

Republicans are going along with bad economics because they are unable (or unwilling) to make the powerful economic case for ending the tax break. The longer it lasts, the more likely it is to become permanent, with disastrous results.

I guess we have little confidence in the good sense of American voters. If they are worried about the solvency of social security, clearly they could be made to understand that you don’t take away a large portion of its funding, for uncertain and unlikely short term gain.

Republican leaders wilt when they hear the President speaking about the extra $1,000 in the pockets of U.S. households.

Too bad.