Yeah, I know I’m supposed to feel all warm and fuzzy about the fact that Democrats and Republicans didn’t play this out to the 11th hour, like they do with every other dispute these days. We’re supposed to cheer because the system worked and it produced a bipartisan result in a year that will see precious few of them. Too bad that it sucks money out of an already-ailing trust fund while delivering none of the economic impact promised when we tried it last year:
Congressional negotiators resolved all differences on an agreement to extend the payroll tax cut and unemployment benefits while avoiding a fee cut for Medicare doctors for the rest of the year, leaving only technical issues to sort out.
“It’s good for the country. It’s very good for the country,” Montana’s Max Baucus, the Democratic chairman of the Senate Finance Committee, said early Thursday in announcing the deal.
But resolving those technical issues and getting the necessary signatures required to finalize the conference report was expected to take through at least Thursday.
“For the good of the country”? Really? It’s more for the good of incumbents who stepped into a trap in December 201o when they first proposed the supposed stimulus of the payroll-tax holiday. The extra
$40 $20 a week average ended up providing such a big stimulus that most people never even noticed it, and the American economy growth rate managed to drop from 2010 to 2011. The only reason Congress was in such a rush to work in bipartisan fashion to extend this temporary, ineffective flop was to avoid having the other party accusing them of hiking taxes on the middle class in an election year.
Chuck Blahous calls the spectacle a lesson on how not to make public policy, and gives seven detailed reasons why. He concludes:
The political dynamic surrounding the payroll tax cut has now evolved in such a way that neither party wants to be blamed for its expiration, so it will likely be extended even though it has now become almost a perfect storm of policy mistakes. Its ultra-temporary nature undoes virtually all of the positive stimulus impact claimed for it, while the adverse effects include high policy uncertainty, undercutting budget transparency, increased fiscal pressure, and lasting damage to Social Security’s financial and political foundation, this last of which may well prove irreparable.
Our public policy process is ever an imperfect one, necessarily producing messy outcomes because of the compromises necessary between conflicting perspectives. But even by these standards, it is rare for policy makers to inflict as much damage as is being done with the payroll tax cut. If lawmakers cannot muster the will to terminate it now, one must hope that they are able to do so before it goes on too much longer.
We need to end the temporary tax gimmicks, especially those that have nothing to do with long-term investment, and instead reform tax codes permanently and reduce regulation so that investors can price risk effectively. Programs like the payroll-tax “holiday” make the investing environment worse by introducing far too much instability and uncertainty into those calculations, as well as accelerating the fiscal time bombs in our entitlement programs. That’s why this is more of a headdesk moment than a celebratory event.
Update: Joe R e-mails me to note that the $40 figure is actually per two-week pay period. It’s $20 a week. I’ve fixed it above.