Economic policy must be focused on creating jobs and strengthening the economy, not counterproductively cutting spending or reducing the deficit. Without additional fiscal stimulus, it will be years before the stubbornly high unemployment rate returns to pre-recession levels; reaching those levels would require putting 11 million Americans back to work.
Following the disappointing May employment report, the administration is now floating an extension or expansion of the payroll tax cut enacted last December. The administration is right to seek more support for the economy.
If political circumstances require that additional economic support must come through the tax code, a payroll tax cut would help turn the dial on unemployment in the right direction, albeit insufficiently. Even better would be reinstating the targeted, refundable Making Work Pay tax credit, which was replaced by the flat payroll tax cut. Targeting assistance to families likely to quickly spend an extra dollar would be more cost effective, but either policy would raise disposable incomes and increase demand for goods and services.
But political viability should not be confused with economic effectiveness.
Direct spending generates more economic activity per dollar than tax cuts, because tax cuts can be saved or used to pay down debts instead of increasing current consumption. A dollar of infrastructure spending packs about four times the economic punch of a dollar of income tax cuts. With long-term interest rates at historically low levels, financing overdue infrastructure investments would more effectively increase employment and spur long-term growth.
The administration should champion additional economic support, the politically feasible and infeasible alike, but near-term job creation must not come at the expense of public investments or economic security programs. The immediate spending cuts demanded by conservatives pose grave risks to the economic recovery; austerity must take a back seat to the more pressing need to create jobs.
With high unemployment and low interest rates, cutting spending will decrease employment—period. If further tax cuts are coupled with spending cuts of equal magnitude, employment will also fall. Another payroll tax cut would help to ease the jobs crisis, but would make a bad trade for premature spending cuts.
Note: This op-ed was originally published in the June 17 edition of USA Today