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Kuros
Joined: 27 Apr 2004
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 Posted: Fri Dec 17, 2010 11:33 am Post subject: The Second Stimulus |
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The House, following Senate approval, passes Obama Tax Cut Compromise
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The House of Representatives has passed a sweeping federal tax bill based on a compromise crafted by President Barack Obama and congressional Republicans, despite passionate opposition by many liberal members of the president's own Democratic Party. The Senate passed the tax legislation easily on Wednesday, meaning the bill will now go to the president for signing. The vote on the bill was 277-148.
The legislation extends Bush-era tax cuts for all Americans for two years, even the wealthiest, although the president and Democratic lawmakers originally had hoped to extend tax cuts for individuals for only the first $200,000 they earned in a year.
The $858 billion measure also extends unemployment benefits for 13 months for the long-term unemployed and imposes a two percent cut in payroll taxes. The president negotiated the compromise with a group of Republican lawmakers headed by Senate Minority leader Mitch McConnell and pushed hard for Congress to pass it, saying it is crucial to fuel economic growth and create jobs.
Democratic Representative Jim McGovern of Massachusetts summed up the argument expressed by many liberal Democrats that it is immoral in times of economic hardship for so many working class Americans to give more tax breaks to millionaires. |
At $858 billion, this Stimulus outstrips the initial $787 billion stimulus measure passed less than two years ago. Nevertheless, except for the much needed unemployment benefit extension, the Second Stimulus is less likely to filter down to those in the greatest need: the unemployed and the underemployed.
Simon Johnson blasts this embrace of Voodoo Economics.
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More generally, fiscal stimulus is unlikely to have much lasting effect, as is the case now. There may be some temporary positive impact on demand, or higher interest rates could offset the entire fiscal push � rates on the benchmark 10-year Treasury bond are up significantly from a month ago (from 3.21% to 4.16%), when the discussion of tax cuts began in earnest.
The market is nervous � mostly about the prospect of large fiscal deficits as far as the eye can see. Some commentators dismiss this as irrational, but, again, that is wishful thinking. The path-breaking work over many years of Carmen Reinhart, my colleague at the Peterson Institute in Washington, makes this very clear � no country, including the US, escapes the deleterious consequences of persistent large fiscal deficits. (Indeed, her book with Ken Rogoff, This Time Is Different, should be required reading for US policymakers.)
In this environment, a further fiscal stimulus may prove counterproductive, with the extra spending counterbalanced by the negative effect on the housing market of higher interest rates. The US Federal Reserve promised to hold down longer-term rates, but its commitments in that direction now seem ineffective. |
The best way to look at this Second Stimulus is political insurance for Obama in 2012. After all, his payroll tax cut was engineered to increase voters' disposable income, but not actually induce employers to hire new employees.
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In both cases, admittedly, a tax cut might directly increase demand and, with nominal wage rigidity, increase employment. But when you cut taxes on employers, the incentive effect and the fiscal effect work in the same direction. When you cut taxes on employees, the incentive effect and the fiscal effect work in opposite directions.
That's why Obama's proposed payroll tax holiday botches an idea of truly Singaporean cleverness. Instead of giving the tax cut to employers, where it would do the maximum good, or splitting it evenly, where it would do intermediate good, he's giving all of it to employees, where it does the minimum good:
The payroll-tax reduction under discussion now would cut the 6.2% Social Security tax levied on a worker's wages to 4.2%. A worker making $40,000 a year would save $800, and some economists say that could help stimulate demand at a time when the economy remains relatively weak.
The employer's half of the tax--also 6.2%--wouldn't be affected under the White House proposal, and thus the cost of hiring new workers wouldn't be directly affected. |
So Congress leads us to another expensive failure. I'm talking as much about Obama's Presidency now as the Stimulus. |
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Ya-ta Boy
Joined: 16 Jan 2003
Location: Established in 1994
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| Posted: Sat Dec 18, 2010 4:16 pm Post subject: |
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I think the best way to look at this is a good faith effort by Obama to avoid the Republicans raising everyone's taxes on January 1, thereby reducing consumers income, rather than let those whose incomes are over $250,000 lose their bonus tax cut.
I don't like a lot of the bill, but the alternatives were worse. Given the political reality where the Republicans say, "Reality notwithstanding,..." before they state their latest talking point, there wasn't much else that could be done.
The real fireworks begin on Jan. 5 when the anti-government majority will be in control of the House which constitutionally must begin any fiscal bill. Prepare to see the entire 20th Century put up for a re-vote. Buckle your seat belt! |
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Kuros
Joined: 27 Apr 2004
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| Posted: Fri Dec 24, 2010 3:35 pm Post subject: |
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On the plus side, the Stimulus has empowered the rest of Obama's agenda: the repeal of DADT, the 9/11 responder's health bill, and the START treaty.
The Mighty Lame Duck
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The key to this burst of activity was the tax cut deal that Obama signed on Friday. Initially, his agreeing to extend for two years the< Bush-era rate cuts for the rich, along with generous terms for the estate tax, aroused anger in his own party, especially among liberals eager for a showdown. This diminished once it became clear that in exchange for meeting Republican demands on taxes, Democrats would get what amounted to a second stimulus package -- tax cuts for the poor and middle class, along with extended unemployment benefits and corporate credits designed to goose the economy.
But the Democrats got much more than that. Had the Republican minority leader, Senator Mitch McConnell, carried out his threat to shut down the Senate unless the Bush tax cuts were extended -- and since he presided over 91 filibusters this Congress, there's no reason to think he wouldn't have -- nothing that has happened since the tax deal was struck would have occurred. And a lot has happened. |
I don't know if its worth it. We'll have to wait until 2012 and see. |
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