Debt ceiling negotiators fiddle while Rome burns.
The federal deficit must be brought under control, to be sure. But that’s a long-run problem. Our immediate and far more important concern is the massive unemployment that persists in the wake of the 2008 financial crisis.
Deficits cost us the interest we pay to the Chinese and others who hold American bonds. Unemployment costs us the vastly larger value of what idle workers could have produced. If even half the people who are currently unemployed or underemployed could find suitable work, national income would grow by more than ten times the interest cost on the 2011 federal deficit. Yet those who press for immediate reductions in government spending want us to take steps that would actually increase unemployment. That’s unspeakably wrongheaded.
Readily available options would enable us to tackle both problems at once. The Nevada State DOT, for example, describes a badly worn 10-mile stretch of Interstate 80 that could be resurfaced today for $6 million, a job whose cost would escalate to $30 million if we wait two years. Deficit hawks say, preposterously, that spending this money would impoverish our grandchildren. But fixing that road now would not only put idle workers back on the job, it would also mean smaller deficits going forward. It would enrich our grandchildren!
If the most effective dual-purpose remedies are politically unthinkable, however, what’s to be done? One promising measure is a payroll tax holiday. Congress should declare an immediate suspension of the payroll tax for employees, which would stimulate spending and employment by boosting take-home pay by 6.2 percent. Congress should also exempt employers from making contributions for newly hired workers, which would reduce after-tax hiring costs by 6.2 percent. (Such steps would go far beyond Congress's move last December to cut employees' contribution to the payroll tax to 4.2 percent of salary for the 2011 calendar year.)
This payroll tax holiday should remain in effect for as long as unemployment remains above 7 percent. In my recent Economic View column in the New York Times, I report that taking these steps would increase employment by at least 7 million workers by the end of 2012.
Payroll tax revenue has traditionally been designated to pay for Social Security benefits. During the tax holiday, the Treasury would need to issue new bonds to make up for the lost revenue. But that would not compromise our long-term goal of deficit reduction.
Achieving that goal will require creative thinking about additional revenue sources and judicious decisions about future spending. But getting people back to work must be our immediate concern.