In A Zero Lower Bound Recession, A Payroll Tax Cut Is Not Stimulative

By Big Tent Democrat, Section Economy
Posted on Tue Aug 30, 2011 at 10:11:06 AM EST
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The Obama Administration wants to extend the temporary payroll tax cut it brokered with Mitch McConnell in December 2010 (it was part of the infamous Deal that extended the Bush tax cuts.) While some like Ezra Klein hailed this initiative as great stimulus, the record is mixed at best. Bruce Bartlett writes:

[T]here is no evidence that the lower payroll tax has done much of anything to stimulate either spending or hiring. There are a number of reasons for this. [. . .T]he tax cut only helps those with jobs. While many have low wages and undoubtedly are spending all their additional cash flow, those with the greatest need and most likely to spend any additional income are the unemployed.

[. . . E]ven if one assumes that the cost of employment has declined and employers can somehow capture some of the payroll tax cut, there’s little sign that labor costs are the principal factor holding back hiring. The main one is a lack of sales, as monthly surveys by the National Federation of Independent Business document. In the latest survey, 23 percent of businesses said poor sales were their No. 1 problem and only 4 percent cited the cost of labor.

(Emphasis supplied.) I'm not sure why the lack of demand in a zero bound recession is not recognized as the problem here by the VSP in this country. The issue is how to stimulate demand. For this purpose, spending, by the government, is what is required. It seems clear no one wants to understand this. Bartlett writes:

In my view, the $110 billion cost of the one-year Social Security tax cut would have been far better spent on measures that would actively raise spending in the economy. Public works would be the best way of doing that. Under current economic conditions, all tax cuts are essentially passive and do almost nothing to increase aggregate demand or economic output.

This seems obvious. But what is worse is that this tax cut will be used as part of the excuse to cut government spending now and in the future. It was a mistake at the time and it would be a mistake to extend it.

Speaking for me only

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In A Zero Lower Bound Recession, A Payroll Tax Cut Is Not Stimulative | 27 comments (27 topical)

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Lack of Aggregate Demand (5.00 / 1) (#1)
by MKS on Tue Aug 30, 2011 at 10:18:51 AM EST

This is what drove Keynes to write his General Theory.....

Why will few see it? Good question.

After all, this Recession is compared to the Great Depression, as in this is the worst economy since the Great Depression.

Republicans tell me all the time that the New Deal did not work and it took WWII to get us out of the Great Depression......The rejoinder that that shows that the New Deal was too small just amazes them.....

The reason the Republicans don't see it is that they really don't care about unemployment. Their bugaboo is taxes and inflation. They have jobs, and everyone else is just lazy.....That is what they really believe and will say when being honest....

Obama's compromise position? (5.00 / 1) (#3)
by MO Blue on Tue Aug 30, 2011 at 10:31:33 AM EST

Conservative economist Kevin Hassett, whose thinking often influences Republicans, sounds a lot like what was proposed by the Cat Food Commission, the Gang of Six and elements of Obama's "Grand Bargain."

Hassett says a better way is to reduce the costs of long-term benefit programs like Medicare and Social Security and use some of the savings to enact a permanent tax cut for corporations, thus spurring higher earnings. link

As you can see the focus is on corporate tax cuts and higher corporate earnings for the Masters of the Universe and nothing for the peons but sacrifice.

Karl Marx Got It Right. Capitalism is a Failure. (5.00 / 3) (#4)
by Dan the Man on Tue Aug 30, 2011 at 10:41:46 AM EST

Bloomberg Link

"Marx also pointed out the paradox of over-production and under-consumption: The more people are relegated to poverty, the less they will be able to consume all the goods and services companies produce. When one company cuts costs to boost earnings, it's smart, but when they all do, they undermine the income formation and effective demand on which they rely for revenues and profits.

This problem, too, is evident in today's developed world. We have a substantial capacity to produce, but in the middle- and lower-income cohorts, we find widespread financial insecurity and low consumption rates. The result is visible in the U.S., where new housing construction and automobile sales remain about 75% and 30% below their 2006 peaks, respectively."

Just as the breakup of the USSR was due to the failure of communism, so also the never ending recession is due to the failure of capitalism.

Exactly...and so well stated (5.00 / 0) (#5)
by Militarytracy on Tue Aug 30, 2011 at 10:46:49 AM EST

There is no real improvement, it isn't a form a stimulus that can have much affect in a zero lower bound recession and this tax cut will be used as part of the excuse to cut government spending now and in the future

It will amp up what is leading us to an even worse economy and future.

Until Obama and the members of his (5.00 / 2) (#7)
by Anne on Tue Aug 30, 2011 at 11:11:53 AM EST

economic team - such as it is - stop going to old, tired, don't-work, Republican solutions to what ails this economy, in the belief that in their (nominally) Democratic hands magic will happen, the status quo will persist: those at the top - both individuals and corporations - will continue to benefit, while those below will keep falling farther and farther behind.

If one can take the position that this president truly wants to lift up the masses, then it has to be said that there has been a gross failure of imagination and will. Yes, we all understand that it isn't always possible to get everything you want, but don't you first have to operate as if you actually do want it? Doesn't the goal - shouldn't the goal - be bigger than the constantly lowering metric of what others are willing to give you? How is that leadership?

So, then one has to take a close look at whether this administration might not just be willing to settle for the status quo because they believe that on the levels where the money is, it's working for them. If corporations can make do with fewer employees, they can keep profits, dividends and upper-level compensation up. With so many people out of work, those who are working are compliant and submissive and willing to accept no raises, longer hours, reduced benefits, because having a job is still better than not having one. With so many people willing to work for less, many who are able to get work are making less.

This is some great legacy Obama's working on, isn't it? Friend To The Rich, Indifferent To Everyone Else.

When pay is being cut and cut (5.00 / 4) (#15)
by Towanda on Tue Aug 30, 2011 at 11:45:53 AM EST

as has mine and that of all other workers for the single largest employer in my state, and that's a story repeated in state after state -- nope, a payroll tax cut is not stimulative. It just softens the blow a bit, but we're all still spending less.

And with another paycheck hit this month, the largest yet that will cut take-home pay by 10 percent for all of us -- put it this way: I will be making less than I did 10 years ago at exactly the same job -- then you know that the payroll tax is not stimulative and certainly not nearly enough.

Of course, it will be trumpeted as a huge success for the next year and some to come in a campaign that will stimulate my stomach, as I will throw up a little bit in my mouth every time I have to hear how much this administration did for me.

: I take it your employer is the state (none / 0) (#23)
by jimakaPPJ on Tue Aug 30, 2011 at 09:22:14 PM EST

Defunding social security is (5.00 / 3) (#21)
by oldpro on Tue Aug 30, 2011 at 06:21:09 PM EST

an outrage and undermines our declared Democratic values while contributing to the perception (indeed, the reality by this tactic!) that social security is underfunded and in danger. Thanks to Obama and the Democrats, it is and will be. Yet I am supposed to be wary of Republicans' plots against social security?

What's (none / 0) (#2)
by Ga6thDem on Tue Aug 30, 2011 at 10:20:29 AM EST

left to say other than Obama continues to write his own political obituary?

PTH is bad policy (none / 0) (#6)
by NMvoiceofreason on Tue Aug 30, 2011 at 10:52:56 AM EST

The payroll tax holiday is a bad policy on several levels, for several reasons. It defunds social security, and in a wonderful "deal", it could do that forever while the Obama/Bush tax cuts are made permanent. PTH has no psychological component - unlike a tax refund check, nobody even knows it is there. PTH does not help anyone get a job. PTH does not help anyone keep a job. PTH is not leveraged. For instance a 20,000$ per net new employee tax credit would at least have the rest of the wages contributed by the employer.

Finally, even if you think the Obama administration policy of dumping money onto the streets of Kabul and Baghdad is a good thing, dribbling it out it dollar amounts too small to be noticed or collected for a major purchase defeats the whole purpose of a stimulus package in the first place. What are we supposed to by with it this week, a box of Kleenex?

The Pentagon (4.00 / 1) (#10)
by Warren Terrer on Tue Aug 30, 2011 at 11:18:47 AM EST

has no funding mechanism, and yet absolutely no one is worried that there won't be enough money to fund America's future wars. The separate funding mechanism for SS hasn't protected it in the least. Both parties claim that SS has a funding crisis and that its funding is a threat to the overall budget even though it is separately funded.


: We aren't worried though (none / 0) (#18)
by Militarytracy on Tue Aug 30, 2011 at 01:33:40 PM EST

because the existing powers that be will not cut us. The Overton Window is shining sweet sunlight all over us and no end is in sight at this time other than the Wall Street vampires are attempting to steal our retirements, and that might be okay because that is just some flesh and blood idiot and not a contractor or corporation. They will cut Social Security though, across every aisle they are hell bent to do it and defunding Social Security now gives them even more ammo to claim it is insolvent.

You are confusing (none / 0) (#8)
by Warren Terrer on Tue Aug 30, 2011 at 11:15:25 AM EST

the degree of stimulus with whether something is stimulative at all. You are really just making the same argument as those on the right who claimed that the 2009 fiscal stimulus was ineffective. It WAS effective, it just wasn't big enough to do the job required.

There is no doubt that a tax cut to working class people is stimulative. They will now have more money to spend than they did before. More money will be left in the economy than would have otherwise been removed by the government. That's what stimulus is.

The question is how stimulative will it be? Analysis shows that fiscal spending is more stimulative dollar for dollar than a tax cut because a portion of a tax cut will always end up being saved rather than spent. No argument there. But this tax cut will still be stimulative. How stimulative it will be will indeed depend on the number of employed who actually receive the cut as you point out. But high unemployment reducing the number of people receiving this cut doesn't mean it's not stimulative. It just means it's not as stimulative as you would like. No where have you presented any figures on just how stimulative this cut would be.

The argument that this stimulus won't directly lead to hiring is true but a non-sequitur. Proponents of the FICA cuts who know what they are talking about do not claim that the cut will cause employers to hire because of the cuts. The argument is that the cut will cause greater employee spending which will have a stimulative effect on the economy. You have presented no numbers to show that these cuts won't be stimulative at all.

I agree that the cut could be used as an excuse to reduce fiscal spending. But that's a separate argument and does not go to the question of whether a FICA cut will be stimulative.

How big will the proposed cuts be? How much money will that leave in the economy? You have to look at those questions before you can pronounce this as ineffective. A FICA cut will be stimulative. You can't just dismiss it. It won't, however, be stimulative enough. It must be coupled with fiscal stimulus in order to do the job required.

the question is not (5.00 / 1) (#11)
by ruffian on Tue Aug 30, 2011 at 11:20:45 AM EST

'how stimulative will it be'

It has already been in effect for 8 months. The question is - how stimulative was it? Can you point to any evidences of its stimulative effect in the last 8 months?


I make an ok salary (none / 0) (#12)
by jbindc on Tue Aug 30, 2011 at 11:23:18 AM EST

My check last January was raised by about $3.

How stimulative was that?


: Only $3.00??? (5.00 / 1) (#17)
by StephenAG on Tue Aug 30, 2011 at 12:35:18 PM EST

Jeez, for that amount you can't even get a decent bottle of K-Y Jelly, which isn't very stimulative at all! Harrumph!

They funded so many and paid (none / 0) (#24)
by Militarytracy on Tue Aug 30, 2011 at 10:49:53 PM EST

the wages of so many jobs that would have immediately disappeared, it is mind boggling the amount of economic contraction we would have experienced at that time without it. We would have kissed a Great Depression immediately and fully on the lips.


: Sorry, misunderstood what you were saying (none / 0) (#25)
by Militarytracy on Tue Aug 30, 2011 at 10:55:04 PM EST

I was talking about the initial "real" stimulus that some say did not work. The tax holiday will sadly lead to more economic contraction because we need those retired persons spending that Social Security check in the economy. They spend almost all of it, those dollars are turned over and over and aren't feathering the nests of the rich just sitting there feathering. They are defunding Social Security though, meaning it will now have to be cut and every dollar they cut out of someone's Social Security check is almost 100% cut right out of the main street economy.

It is a headline (none / 0) (#13)
by Big Tent Democrat on Tue Aug 30, 2011 at 11:24:02 AM EST

And frankly, when you net it out, given the likely spending cuts it will generate, I doubt the stimulative effect amount to much at all.

It is basically going to be a transfer of government spending for tax cuts.

That's anti-stimulative. You say that is a "separate argument." To you maybe. Not to me.


Netting it out (none / 0) (#14)
by Warren Terrer on Tue Aug 30, 2011 at 11:34:47 AM EST

is the entire fallacy.

In my view, the $110 billion cost of the one-year Social Security tax cut would have been far better spent on measures that would actively raise spending in the economy.

Bartlett's entire argument is premised on the fallacy that you can either go for a payroll tax cut OR you can have spending. He entirely ignores the fact that you can do both.

And this comment from him:

Thus, a lower Social Security tax could actually be contractionary rather than stimulative.

is just preposterous. It's based on the same reasoning that leads to the right wing argument that deficit spending now is pointless because it must lead to higher taxes in the future, so therefore people will save now for those future tax increases and end up offsetting the spending for a net of zero.

I'm really baffled as to why you are siting this former Reagan and Bush advisor as your authority on this subject.


: Strong disagree (none / 0) (#16)
by Big Tent Democrat on Tue Aug 30, 2011 at 11:59:31 AM EST

snd leave it at that.

Question (none / 0) (#19)
by jimakaPPJ on Tue Aug 30, 2011 at 02:39:36 PM EST

It WAS effective, it just wasn't big enough to do the job required.

Just how big would it have had to be?


: Bigger than it was....doh (none / 0) (#26)
by Militarytracy on Tue Aug 30, 2011 at 10:55:48 PM EST

It prevented an immediate Depression though

Tax holiday was too small to notice, yet GOP pols (none / 0) (#9)
by ruffian on Tue Aug 30, 2011 at 11:17:16 AM EST

will have people up in arms about ending it and 'raising taxes'. Hated it from the get go.

People probably did pay bills and pay down debt with it. Good for them, but not a stimulus.

: Actually, (5.00 / 1) (#22)
by TeresaInSnow2 on Tue Aug 30, 2011 at 06:47:09 PM EST

Actually, the GOP is fine with ending the payroll tax holiday....they say things like.. "I'm for tax cuts but not THESE KINDS of tax cuts..."
Here's one link:

The larger point is that it will not be consumer (none / 0) (#20)
by ruffian on Tue Aug 30, 2011 at 03:57:49 PM EST

spending that solves the unemployment problem, if anything does. Rampant debt fueled consumer spending is a thing of the past, and that is mostly for the good.

If the government is not going to spend on things the government can do, like infrastructure and education, we are not going to get many more jobs.

All part and parcel to obama... (none / 0) (#27)
by pluege2 on Wed Aug 31, 2011 at 09:34:54 PM EST

undermining social security. Insidious really. republicans must be so envious.