WSJ swings and misses on tax policy
In a scathing critique of the House Republicans’ strategy regarding the payroll tax cut, the Wall Street Journal’s editorial board really botched the underlying economics:
“House Republicans yesterday voted down the Senate’s two-month extension of the two-percentage-point payroll tax holiday to 4.2% from 6.2%. They say the short extension makes no economic sense, but then neither does a one-year extension. No employer is going to hire a worker based on such a small and temporary decrease in employment costs, as this year’s tax holiday has demonstrated. The entire exercise is political, but Republicans have thoroughly botched the politics.” (Bold added.)
The Journal‘s editorial page inverts the economics of the payroll tax cut by confusing the enacted employee-side tax cut (being considered for extension) with an employer-side tax cut. The objective behind the employee-side payroll tax cut extension is to put $120 billion worth of disposable income into the hands of consumers, creating and sustaining demand for goods and services, rather than altering marginal hiring costs.
The two-month extension that passed the Senate with overwhelming bipartisan support would increase disposable income by $20 billion via the payroll tax cut and pump another $8 billion into the economy through emergency unemployment benefits. Short of assigning a zero (or negative) fiscal multiplier to these programs, it can’t be argued that this will have no impact on an economy running $918 billion (5.7 percent) below potential output. And recent research by Berkeley professors Alan Auerbach and Yuriy Gorodnichenko, among others, finds that large output gaps imply large multipliers; a zero fiscal multiplier for government spending in a depressed economy is entirely unsubstantiated. (A legitimate critique would be that serious infrastructure investment or public works employment would be a better way to generate demand than the payroll tax cut, some of which will undoubtedly be saved.)
With regard to the duration of extension, Howard Gleckman aptly notes that setting tax policy in two-month increments makes little sense, but I think the Journal’s editorial board would agree with Gleckman that House Republicans only have themselves to blame for that situation.