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More on the “Second Stimulus” Impact of the Tax Deal Framework

Ezra Klein tweets that the tax cuts deal proves that “liberals care less about stimulus, than their rhetoric would suggest.” Robert Gibbs, who said that the deal was not meant to be a second stimulus, would probably not go so far.

But let’s look at that question. CAP is out with a paper claiming that this deal will create 2.2 million jobs, and really three million if you add in the rest of the Bush tax cuts that are getting extended as expected. So $900 billion over two years for 3 million jobs. Ryan Avent also sees economic advantage here.

THE number crunchers have had their first stab at Monday’s tax deal and the economic impact is impressive. Goldman Sachs now thinks the economy will grow 0.5 to 1 percentage points faster next year than its current forecast of 2.7%, which was bumped up from 2% only a week ago. JPMorgan has raised its 2011 forecast (fourth quarter compared to a year earlier) to 3.5% from 3%. Moody’s Economy.com sees growth next year at 4%. All of these forecasts imply some decline in the unemployment rate […]

The initial reaction, in particular among liberal commentators, was that this was a political loss for Barack Obama, since he gave up more than the Republicans. I initially shared that view, but a colleague notes that this constitutes a loss only by narrow Beltway-based accounting. What will ultimately matter in 2012 is how the economy performs, not whose policies are responsible for that performance. If the economy is booming a year from now, Mr Obama may be seen to have lost the battle but won the war. In spite of their grumbling, the rest of the Democratic caucus may also benefit. As a correspondent notes, “This is a pro-incumbent kind of package. And Democrats have a lot more incumbents running in 2012 than Republicans do.”

I’ll take that as far as it goes, but I have to go back to analysts are viewing this in a vacuum. First of all, it wasn’t so long ago that payroll tax cuts were seen as poor stimulus – all the way back to 2009. Too much of the benefit goes to higher-income households. Second, you’re still going to see a loss of productive capacity in two quarters – one, from the 99ers, who now number 2 million and who will get nothing from this deal, and two, from construction workers, who didn’t get an expansion of Build America Bonds or infrastructure spending and who therefore will remain on the sidelines. The stimulative impact of these tax cuts are more structured to service-sector jobs.

But more important than all of that, and most important of all, there will be more fiscal policy decisions made this year. And as a cause of spending $900 billion for what amounts to a moderate stimulus, you’re going to see a surfeit of spending cuts, without question. The debt limit is hanging out as a point of leverage for Republicans to grab them. Moderate Senate Democrats are clamoring for them. Treasury bonds actually shot up today, providing pressure for the cutbacks. And the President is only a week removed from calling for a pay freeze. If it’s “pragmatic” and “responsible” and saves the country from harm, he’ll agree to serious and immediate cutbacks in spending. And poof, there goes your stimulative impact.

So it’s not that liberals don’t care about stimulus. It’s that they care about actual stimulus, not a fantasy of stimulative impact that will be quickly offset in the future, and that comes with maintaining unsustainable tax rates that doom progressive governance far into the future.

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David Dayen

David Dayen

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