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Stimulus At Stake in Payroll Tax and Unemployment Renewal

David Callahan

Now that the supercommittee has closed it's doors, Congress can get on with the all-important work of extending two of the most powerful stimulus measures in effect today -- the reduced payroll tax and extended unemployment benefits.

Attentive students of Washington's now perpetual budget saga will recall that the deal to raise the debt ceiling back in August mandated an end to both the payroll tax cut and extended unemployment benefits. As we noted back then:

Axing these two policies alone will suck $163 billion out of the pockets of American consumers in 2012, according to an analysis by John Irons at the Economic Policy Institute. And because this spending -- unemployment payments especially -- has a multiplying effect in terms of economic activity, the overall result will be to decrease GDP by 1.2 percent in 2012. . . . In turn, based on models of how economic activity effects employment, the net result will be an increase of unemployment by 0.6 percent and 1.8 million fewer jobs.

Last I checked, killing off jobs was not what the public wants Congress to be doing right now. Quite the contrary: job creation is now far and away seen as the top national priority, well above deficit reduction.

President Obama has proposed legislation, as part of his American Jobs Act, that would expand the payroll tax cut by making it more generous and extending it to employers as well. In fact, this is the biggest single item in that proposed legislation. Congress will be debating the idea soon and odds are good that the White House won't get what it wants. The only time Republicans don't like big tax cuts, it turns out, is when they might help an incumbent Democratic.

But let's pray that Congress at least extends the payroll tax cut that is now in place, which effectively increases the pay of nearly all workers by 2 percent. Ending this break would be harsh medicine for millions. As Chuck Marr of the Center for Budget and Policy Priorities points out:

Failure to extend the payroll tax cut would hurt workers in nearly every job and income category. For example, the nation’s 1.4 million truck drivers, whose salaries average $39,450, would pay $789 more in payroll taxes, on average. The nation’s 2.7 million nurses, whose salaries average $67,720, would lose $1,354, on average.

Not good: a pay cut at a time when consumers are already tapped out. 

Failing to extend unemployment benefits could be even more devastating. A recent study by the National Employment Law Project laid out what is at stake in this debate:

In January alone, 1.8 million workers who currently receive federal unemployment insurance or would have begun to receive it will be cut off if Congress does not renew the program before it expires on December 31st. . . . Nearly 650,000 workers in 33 states and the District of Columbia will face an immediate “hard” cut-off of their benefits in January, after struggling to find work and pay their bills for over a year in most cases. There is no phase-out allowing these workers to collect the remainder of their final 13 to 20 weeks of benefits.

Quite apart from the human toll of cutting these benefits, the effects on the economy would be very negative since unemployment benefits are one of the most powerful forms of stimulus, creating $1.61 in economic activity for each dollar spent.

Congress now has the lowest public approval ratings on record. One way to move those numbers up -- and bolster an economy still sputtering -- is to renew unemployment benefits and the payroll tax cut.