This should be a lesson to politicians and economists about the nature of gimmicky “stimulus” efforts …. but probably won’t be. In the pressure cooker of the tax fight over the holidays, most people forgot about the payroll-tax holiday — the reduction by two percentage points of FICA withholding for Social Security. Its backers claimed that putting $20 a week in the hands of earners would boost spending and the economy, which turned out to be entirely false. They then claimed that the expiration of this temporary stimulus would tank the economy through reduced spending.
And that also turns out to be false. The Washington Post is (mildly) shocked, shocked to find people spending money anyway:
Some of the nation’s largest retailers posted solid gains in January even though shoppers were hitting the malls with smaller paychecks.
The results reported Thursday offer the first glimpse into how the expiration of the payroll tax cut is affecting household budgets. A worker making $50,000 a year faces a decrease of $1,000 in take-home pay over the course of the year, and economists predicted spending would fall off. But many companies found that shoppers were more resilient than expected.
According to the International Council of Shopping Centers, retail sales rose 4.5 percent in January compared with a year ago. The data cover sales at stores open at least a year for 22 national chain stores.
“Simply put, January was an outstanding month,” Macy’s chief executive Terry J. Lundgren said.
The Post also cautions that this is more or less anecdotal still. Official retail numbers don’t come out until next week, and stores like Wal-Mart don’t post monthly results. Still, with higher-end retailers like Macy’s and Nordstrom’s posting double-digit increases, and mid-market retailer Kohl’s following suit, it seems unlikely that a discounter like Wal-Mart would be hard hit in the same period.
Surprised? Don’t be. The payroll tax holiday didn’t do anything positive for retail sales when it was implemented, as I explained last year when I first pointed out that its expiration was approaching:
Both sides sold the payroll tax holiday as an economy-stimulating policy. As such, though, it simply followed the failures of Barack Obama’s Making Work Pay weekly tax rebate and George Bush’s lump-sum tax rebate. The numbers involved, about $20 per week, hardly constitute an incentive for spending freely. In the first year of this particular holiday season, personal consumption expenditures (PCE) increased by 3.1 percent (annualized) in the first quarter, but then only rose 1.0 percent, 1.7 percent, and 2.0 percent in subsequent 2011 quarters. In the year prior to this policy’s enactment, PCE grew at more than 2.5 percent each quarter, hitting 4.1 percent in the final quarter before Congress passed this particular stimulus. It’s possible to argue that these 2011 numbers might have been worse without the tax holiday, but it’s impossible to argue that it led to resurgent economic growth.
Furthermore, this “holiday” comes with a price. The money comes out of the Social Security Fund’s revenue stream, which already doesn’t produce enough income to cover outgoing expenditures. This stimulus measure is aptly named, as it provides a “holiday” from fiscal sense in a program that is already on the road to insolvency, if not as quickly as Medicare. At least in principle, this tax cut doesn’t keep funds from the government — it takes it from the retirement funds of the taxpayers themselves, just as if the money had come out of a 401(k) account.
The decision to spend doesn’t come from government stimuli. The payroll-tax holiday joins its predecessors like Making Work Pay and the 2008 Bush stimulus checks that purport to push economic growth by temporarily allowing people to keep a little more of their own money. It’s yet another Cash-for-Clunkers gimmick that doesn’t drive anything but instability and ambiguity.
If we want real economic growth, then we need tax reform that eliminates those two qualities and allows Americans to spend and invest with confidence. That’s the lesson from the payroll-tax-holiday nothingburger, but don’t expect politicians to learn it unless we teach it to them — and then test them on it at the ballot box.
Jack Andrews and his wife no longer enjoy what they call date night, their once-a-month outing to the movies and a steak dinner at Logan’s Roadhouse in Augusta, Ga. In Harlem, Eddie Phillips’s life insurance payment will have to wait a few more weeks. And Jessica Price is buying cheaper food near her home in Orlando, Fla., even though she worries it may not be as healthy.
Like millions of other Americans, they are feeling the bite from the sharp increase in payroll taxes that took effect at the beginning of January. There are growing signs that the broader economy is suffering, too.
Chain-store sales have weakened over the course of the month. And two surveys released last week suggested that consumer confidence was eroding, especially among lower-income Americans.
While these data points are preliminary — more detailed statistics on retail sales and other trends will not be available until later this month — at street level, the pain from the expiration of a two-percentage-point break in Social Security taxes in 2011 and 2012 is plain to see.
So other than a vague reference to a consumer confidence number, what other data does the NYT have to show retail sales falling?
Complete monthly data for retail sales in January will not be released until later this week, but the weekly data already available for last month showed a steady deterioration in shopping activity.
What weekly data? That’s never explained. The NYT offers a half-dozen anecdotes from people who say they are buying less, while the Washington Post uses actual sales figures from retailers that tell an entirely different story. One of these two have gotten the story entirely wrong, and I’m pretty sure it’s the one without any real data.