Friday, December 3, 2010

Trading High Income Tax Cuts For Unemployment Benefits

There has been a lot of talk lately about Democrats trading tax cuts for those who make over a million dollars a year in exchange for Republican agreement to extend unemployment benefits. This is a bad deal and should be rejected. Here is why.

The first thing to recognize is that half-measures are not actually worth that much. Extending unemployment benefits will not do much to keep unemployment low. According to a new White House Council of Economic Advisers report, failure to extend unemployment benefits will cost an additional 600,000 jobs as unemployed people cut back on spending. That sounds bad; but what is actually really bad is that we already have 15.1 million people who are unemployed and can't find jobs and we are not doing anything about it. And there is no reason to think that these people will get back to work anytime soon in the absence of fiscal stimulus. Counter-intuitively, unemployment may have to get worse before it will get better. Only a further worsening of the economic situation will create the political conditions necessary in order to get Republicans to agree to do something about the economic situation.

So, I say let Republicans show their true colors. Let them cut of unemployment benefits for 7.1 million people right before the Holidays if that is what they think is the right thing to do. I don't see why Democrats should bribe them with an extension of high income tax cuts for people making over a million dollars a year in order to induce them to do the right thing. I say, let Republicans refuse to extend the benefits and then face the consequences of their choice.

Second, it has been mentioned that tax cuts are a form of fiscal stimulus. That is, failure to cut taxes is a failure to provide the economy with a form of fiscal stimulus. The likely result of not providing this fiscal stimulus is a worsening of economic conditions. However, it should be noted that tax cuts, especially for those who are already very well off, simply are not a cost effective form of stimulus. The economy is likely to worsen in any case and ultimately we need much more fiscal stimulus that is much larger and in a much more effective form. The sooner we come to that realization, the better. Letting the economy take a hit sooner is better than letting things drag out. It is like the apocryphal story about the frog that stays in water that is slowly brought to a boil, whereas it would have jumped out (taken action to change its situation) if simply dropped in hot water. One can imagine the voting public becoming more and more comfortable with worsening economic conditions, especially as the negative effects  are concentrated on lower income people who do not vote. In contrast, the voting public would be more likely to support action in the face of more sharply negative economic news.

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