The bell is about to ring for round two of the not-so-great fight over how to pay for extending the payroll tax break and extended unemployment insurance benefits.
When we last visited this benighted argument, all sides agreed that the economy needed a yearlong boost from these programs but couldn’t figure out how to pay for them beyond a mere two months. When Congress reconvenes, they’ll be scrounging around for a lot more than the $30 billion they agreed on to cover January and February — it’ll take something like another $160 billion to keep these measures going throughout 2012.
Just for the record, allow me to state, as a good Keynesian must, that it’s economically rational to allow this temporary spending to be added to the deficit. The economy is far from operating at full capacity, and borrowing rates remain very low. Moreover, any “pay-fors” that go into effect too soon could serve to offset the positive economic effects this extra spending will generate.
And as far as the deficit is concerned, temporary measures are not what drive our fiscal woes. By 2014, these expenditures would add almost nothing to the deficit as a share of GDP (about 0.02 percent). What hurts the deficit are permanent spending increases and tax cuts, such as the Bush tax cuts.
Given our improving but still far too weak economy and our long-term fiscal imbalances, a sound approach would be to pay for these measures through offsets that don’t take effect until the economy is clearly out of the woods. But if the debate should come down to either allowing the payroll and UI extensions to expire at the end of February or extending them through the rest of the year without offsets, the latter approach would definitely be better. The economic costs of premature expiration would be steep, while the addition to the long-term deficit would be negligible (for Keynes’s sake, the real yield of five-year Treasury bills is -0.85 percent!).
But, given the aversion to such logic right now, we’re back live, looking for pay-fors.
First, what not to do. Congress should eschew pay-fors that will make things worse for the economy, job creation and poor and middle-class households still struggling with the anemic recovery. Cuts to Medicaid or food stamps would be especially ill-advised. And, the December agreement already shaved 20 weeks off extended UI benefits — going any further down that path would only cut more holes in an already porous safety net.
It would also be reckless to pay for these measures with further cuts to non-defense, discretionary programs. This part of the budget, which includes early childhood education, housing assistance, medical research, help paying for college and more (e.g., air traffic control, national parks, food safety) already is giving at the office, to the tune of around $970 billion over 10 years, according to the Congressional Budget Office. At a time when we are, or at least should be, worried about the impact of higher inequality and diminished mobility, programs that help poor families overcome such barriers cannot withstand more cuts.
There are good ideas to cull from in the president’s September budget, the one he recommended to the failed congressional supercommittee. For example, Medicare could use its bargaining clout to save $135 billion on prescription drug coverage. That change alone, which doesn’t hurt beneficiaries or providers, gets you most of the way there.
And unless we want to replicate the dysfunctional politics of 2011, the pay-fors will need to be balanced between spending cuts and revenue increases.
This would be an excellent time to close the carried interest loophole ($12.5 billion over 10 years). As it stands, the hedge fund and private equity wizards get to treat much of their compensation as capital gains instead of ... um … compensation and are thus taxed at a fraction of the rate that they should be.
Closing international tax loopholes makes a lot of sense in this context as well. Why, when domestic job creation is already one of our nation’s toughest challenges, would we want to make it cheaper to invest and create jobs in China than in Ohio? All told, there’s about $110 billion over 10 years in new revenues from closing these loopholes.
So there’s a menu here from which members ought to be able to choose to close the deal. Yes, it will take some bargaining and concessions on both sides. But let’s face it: they’ve tried it the other way and it hasn’t worked.
Who knows? Try it this way, and Congress might just nudge its approval rating up into double digits.
Bernstein is a senior fellow at the Center on Budget and Policy Priorities. From 2009-11, he was the chief economist and economic adviser to Vice President Biden, executive director of the White House Task Force on the Middle Class, and a member of President Obama’s economic team.