Deal on extending payroll tax cut raises Obama's chances for reelection

Congressional Republicans hope to regain political momentum by putting the payroll-tax fight behind them, but in doing so they have likely improved President Obama’s reelection chances.

For decades, Yale professor Ray Fair has been using an economic model to make predictions on vote shares in presidential years that assumes higher and sustained economic growth will help the incumbent. 

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Fair’s most recent calculations predict Obama will get 50.3 percent of the vote. Without the extension of the payroll-tax cut, Obama’s share would have been reduced to 49 percent in Fair’s model. Add in the extension of the unemployment benefits, Fair said, and that will slightly increase Obama’s vote share even more. 

Either way, the model would suggest a too-close-to-call election, but Fair’s equation gives a sense of why the payroll-tax-cut extension was so important to Obama’s campaign. There are indications that the White House agrees. A Senate Democratic aide told The Hill last week that the administration believes Obama will win reelection if the payroll-tax cut extension is approved.

Various economic projections have been made to calculate the effects of extending both the payroll-tax cut and unemployment benefits. 

The Congressional Budget Office expects the continued 2-percentage-point cut in the payroll tax to generate between 10 cents and 90 cents in economic activity for every dollar of budgetary cost. 

Moody’s Analytics Chief Economist Mark Zandi estimated that extending both the payroll-tax cut and unemployment benefits through the year will add 1 percent to this year’s GDP. 

Most economists expected the package to be approved, but said growth would slow if it were scuttled at the last minute.

“Right now it would be a real shock” to the economy if the provisions were not extended, said Tim Gill, an economist at the NEMA electrical equipment and medical imaging manufacturing group in Virginia. 

NEMA is projecting that the economy will firm up in 2012, but its prediction of growth of 2 percent to 2.5 percent is modest. If the payroll-tax cut and unemployment benefits were sunset, those projections would be cut in half, said Gill, who topped The Wall Street Journal’s economic forecasting survey for 2011.

There are negatives for the economy, of course, to extending the payroll-tax cut. 

Extending the cut for another 10 months will add $100 billion to the deficit, and Republicans and Democrats have agreed that that expense will not be paid for. 

“There’s a real downside here in kicking the can down the road on fiscal problems,” Gill said. 

The payroll tax funds the Social Security Trust Fund, a fact that has drawn the concern of liberals and conservative House Budget Committee Chairman Paul Ryan (R-Wis.). 

There are also different views on how much government spending actually helps the economy. 

In testimony to Congress’s Joint Economic Committee last week, Heritage Foundation senior policy analyst James Sherk said extending federal unemployment benefits only makes sense for “humanitarian reasons.” 

He argued that extending benefits increases the unemployment rate and does not bolster the economy, contending that Keynesian models used by both CBO and Zandi inflate any boost the economy gets from more unemployment spending.

The payroll-tax cut does not lock in an Obama electoral victory either, for reasons of politics and economics. 

Politically, the GOP decision to end the payroll-tax fight could pay off in November by changing the subject in March.

Congressional Republicans are enduring another tough week, with concessions on the payroll-tax fight and the decision to punt an expected vote on the highway bill, which House Speaker John Boehner (R-Ohio) has positioned as the GOP’s jobs bill. 

When Republicans return after the Presidents Day recess, they will, assuming a vote this week, no longer be playing defense on the tax cut. They hope to go on offense on deficits and spending, where they think they are on much stronger ground. Obama had a 50 percent approval rating in a CBS/New York Times poll released Wednesday. The GOP wants to change the game so that rating comes down.

Unknowns with the economy could also drastically change the game. 

At about this time in 2011, people were feeling better about the economy. Then fuel prices spiked amid fighting in Libya, and the global economy took a hit from the devastating tsunami in Japan. 

AAA’s daily fuel gauge report Wednesday showed gas prices steadily rising since the beginning of the year to $4.08 per gallon, but it’s unclear whether the sharp spikes of last year will be repeated and drivers will face $5 gas. 

Gill said he’s not expecting a sharp spike at the moment, but that a $20 to $25 increase in the price of oil would be a problem for the economy. 

Even now, only 44 percent of voters in the CBS/New York Times poll approve of Obama’s handling of the economy, compared to 50 percent who disapprove. That suggests the election will not be a walk in the park for Obama.

Swanson is the news editor at The Hill.