Rescue Payroll Tax Cut and Jobless Benefits From Wreckage: View
Putting longer-term issues aside, the failure of the U.S. debt supercommittee threatens immediate collateral damage. Measures to maintain short-term support for the economy were supposed to be folded into the expected deal. Two of these deserve emphasis.
Extensions to unemployment insurance, allowing claimants in some states to get benefits for 99 weeks, are about to expire. And without further action, employee payroll taxes will rise from 4.2 percent to the standard 6.2 percent at the start of next year.
Congress should act promptly to restore -- and widen in the case of the payroll tax -- both provisions. Letting them expire would cause an abrupt tightening of fiscal policy, not the gradual deficit reduction that the committee was told to design. This would be unsafe. The recovery is still weak, and if it’s allowed to sputter out completely, medium-term deficit reduction will be next to impossible.
The 2-percentage-point payroll tax cut already in place boosted workers’ take-home pay by $120 billion in 2011. This should stay in force for another year, extended to the employer portion of payroll taxes, and increased for both employers and employees to a 3-percentage-point cut. As President Barack Obama proposed in his jobs legislation, the payroll tax cut should also be widened to temporarily relieve employers of the entire 6.2 percent levy for new hires and pay raises. Republicans should be willing to go along. We are talking about tax cuts, after all, that would pump some $240 billion into a struggling economy.
Another renewal of federal support for extended unemployment benefits is a closer call. Two years of payments, as opposed to the usual state-financed six months, encourages some people without work to prolong their search, and perhaps be too fussy about the kind of job they take. This may help drive up long-term joblessness, which in turn may raise the so-called natural rate of unemployment (the rate below which unemployment cannot fall without causing higher inflation).
How lasting this damage might be is debatable, but the danger shouldn’t be dismissed. Plenty of evidence says it’s real.
For now, though, two factors should overrule this concern. The first is humanitarian. At the moment, there are still roughly four unemployed people (conservatively defined as those actively looking for work) for every vacancy. However eager the unemployed may be to get work, any work, most are bound to fail. While conditions are so difficult, the right thing is to provide extended help. Under these circumstances, up to two years of benefits doesn’t seem too long.
The second reason is macroeconomic. The recovery has been surprisingly sluggish. It still needs short-term fiscal support, and extended unemployment benefits are a highly effective way of supplying it. The unemployed spend a higher proportion of their incomes than people who are working: In terms of stimulus bang- for-the-buck, it’s hard to do better. Despite the drawbacks, extended unemployment benefits should be renewed one more time.
The president’s jobs bill includes other good proposals aimed at relieving unemployment: better career guidance and retraining, tax credits for employers hiring the long-term unemployed, use of unemployment insurance funds to promote job- sharing as an alternative to cutting positions, and more. The act as a whole may be doomed, but Congress should mine it for cost-effective proposals such as these, aimed at the most socially and economically corrosive consequences of weak growth.
Whatever the fate of that broader agenda, measures that Congress agreed to in 2010 -- the payroll tax cut and extended unemployment insurance -- need to be rolled forward one more time. These, at least, must be rescued from the supercommittee wreckage.
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