The Economics of the Payroll Tax/UI/Doc Fix Bill
As we await resolution of the payroll tax/UI/doc fix extension bill, I want to address this trend in the comments about whether or not extending these measures is worthwhile at all.
To separate the wheat from the chaff, I don’t think anyone believes that extending unemployment insurance is a bad idea. With no further action, on January 1 99 weeks of benefits will get cut back to 26, immediately throwing 1.8 million jobless Americans off the unemployment rolls and millions more as the months go on, including over a million in California alone.
It is true that even under the Senate bill, certain states will lose the ability to access Extended Benefits, the final tier of the emergency program, and recipients in those states will go from 99 to 79 weeks. That’s pretty disgusting and I hope it gets remedied in whatever bill comes out beyond February. This is not the time to pull back on benefits, when the average duration of joblessness is above 40 weeks and unemployment remains elevated. Maybe that’s a conversation to have when unemployment goes below 8 or 7%, but not now.
As for the doc fix, I have said previously that now would be a good time to renegotiate reimbursement rates with US doctors, who are the highest-paid in the industrialized world, and whose continued high pay represents a hidden tax on families. The threat of a major rate cut could lead to physicians accepting a smaller rate cut. However, if the choice is just to extend the doc fix or not extend it, I don’t think you can deny that doctors would simply stop seeing Medicare patients if they took an immediate 27% hit on reimbursement. The ultimate solution here is to extend Medicare for all, and then doctors will have to accept a rate of pay commensurate with the rest of the world, because there wouldn’t be much of an outlet.
Now we move to the payroll tax cut, which represents more than half of the cost of the bill, and which has been the source of the controversy around these parts. You can argue about the efficacy of what Jared Bernstein calls a “standard issue, non-too-scintillating version of stimulus.” Certainly there are better things to do with $110 billion, the approximate cost of extending the payroll tax cut for a full year. But that’s not to say that it has no impact whatsoever. Indeed, because it’s tied to payroll it acts as a 2% wage increase, and adds to people’s relative disposable income. That’s just math talking. Taking $110 billion out of the economy right now would have a negative impact on growth, a fiscal drag of up to 1%, according to every economic analyst who’s looked at the question. And this 2% wage increase goes to everyone up to $106,000, as we have that cap on payroll taxes. The wage increase for millionaires is significantly smaller (I would cut off the reduction entirely for people making over $250,000 and use that money to bolster paychecks at the low end). This isn’t the best-designed stimulus, but it does go mostly to people with a high propensity to spend.
Indeed, this is not stimulus, but merely extending current law in a way that’s non-contractionary. And if you haven’t noticed, we’re in a period of moderate but steady growth right now. Weekly first-time unemployment claims have been below 370,000 for the past two weeks, the lowest level since early 2008. Revised unemployment figures showed decent job growth in the last quarter, and based on the numbers I’d expect a good number for December. There are still headwinds for the economy, including the news from Europe. But the biggest potential headwinds come from government policy at home, in the form of budget cutbacks at the state and federal level. These would reduce demand significantly, constraining this moderate growth that even by itself is inadequate to catch up to the trend. Calling to end the payroll tax cut now would do the opposite of what’s needed.
Now we come to the idea that this is part of a plot to weaken Social Security’s long-term finances. I said at the time that the payroll tax was an inferior idea for stimulus for these purposes. The Making Work Pay tax cut from the stimulus eliminated the fear around Social Security, and it was better targeted stimulus, with more benefits going to the lower level of income distribution. That would be my preference. Still, I have to call this fear about Social Security, to this point, a dog that hasn’t barked. We had a payroll tax cut for 2011. All of the money from that tax cut has been put into the Social Security trust fund. Under the law, all of the money from this tax cut will get put into the trust. But that’s not the real issue, say many. It’s that rhetorically, money is going toward Social Security from the general fund, and that this argument can be used to say that Social Security is hurting the budget, and benefits must be cut to remedy that.
First of all, this isn’t a giant hit to the budget. You’re talking about a temporary $110 billion, and for some reason Congress is hell-bent on paying for it. So the actual cost is $0.00. I would hesitate to go with a payroll tax cut again in 2013, because at that point a temporary tax cut starts to feel permanent. But at this time, I think about the human suffering that a fiscal drag causing a 1% loss in GDP would cause, and I think the risk about turning this into an argument to cut Social Security – which has so far been largely avoided – goes below the risk of putting the economy closer to recession for yet another year. This is not my preferred stimulus. If the economy still needs demand in 2013 I would go with something else. But right now, I don’t see how you just let this expire.