Krugman: The Deal

[ProSense]

The Deal

So the tax deal is out. Obama extracted some concessions, with the big surprise being a payroll tax cut. How much better do these concessions make the thing?

Well, for starters we have the two-year extension of the Bush tax cuts. As I pointed out yesterday, the CBO estimated that such an extension would reduce unemployment relative to what it would have been otherwise by 0.1 to 0.3 percentage points in 2011, twice that in 2012.

To this, the deal added $120 billion in a payroll tax cut; $56 billion in extended unemployment benefits; about $40 billion in extension of other tax credit. Also, expensing of business investment.

I’d discount the last item: we’re awash in excess capacity, and likely to stay that way for years, so I don’t expect business investment to be noticeably affected by tax breaks that give an incentive to move spending up in time. The rest is about $220 billion, or about 0.75 percent of GDP over the two-year period. What’s the multiplier on that? Pretty high on UI, which will get spent; less on the rest. Overall, probably less than 1. So let’s say that this raises GDP by 0.7 percent relative to otherwise; rule of thumb is that one point on GDP is half a point on unemployment, so add 0.35 points to the CBO numbers.

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So, was this worth it? I’d still say no, although it’s better than what I expected over the weekend. It still greatly increases the chances of the Bush tax cuts being made permanent — especially because the front-loading of the stimulative stuff actually worsens Obama’s 2012 electoral prospects.

Overall, enough sweetener has been added to diminish, but not eliminate, the bitterness of the disappointment.

[tekisui]

1. This is a Big Sucking Deal.

[LiberalEsto]

8. And the Great Sucking Sound we hear

is the sound of money being sucked out of middle class wallets for the rich.

[Raine1967]

2. Ezra Klein said a lot of the same thing today.

http://voices.washingtonpost.com/ezra-klein/2010/12/an_imperfect_but_not-that-bad.html

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So is this a good deal? It's a lot better than I would've told you the White House was going to get if you'd asked me a week ago. There's some new stimulus in the form of the payroll-tax cut and the expensing proposals. The older stimulus programs that are getting extended -- notably the unemployment insurance and the tax credits -- probably would've expired outside of this deal. The tax cuts for income over $250,000 are a bad way to spend $100 billion or so, and the estate tax deal is really noxious.

It's bad news for the deficit, though the White House and Congress are right to make the deficit less of a priority than economic recovery. And speaking of that economic recovery? This isn't enough, and it's not well targeted. The deal amounts to the White House throwing some bad money after good. But the end result is between $200 and $300 billion more in tax breaks, tax credits and unemployment insurance than there would've been if not for this deal (I say $200-$300 billion because of the uncertainty over what would've been extended in the absence of this package). That's better than nothing -- or to be more specific, better than backsliding.
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[harun]

3. Wonder where the payroll tax adjustment came from? Didn't hear a word about it until

the deal was made.

[DrDan]

4. guess we will now be hearing what a great win this was for the WH

[tekisui]

5. Of course!

Greatest, most liberal, most effective President EVAH!

[Name removed]

6. Deleted message

Message removed by moderator. Click here to review the message board rules.

[jaxx]

7. "?"

[Cali_Democrat]

9. you think Obama can win the Republican nomination?

[JamesA1102]

10. So Krugman is saying that he would have prefered the unemployed starve

just to stick it to rich people.

[Phx_Dem]

11. Sounds like Krugman's not towing the progressive whine. n/t

[Clio the Leo]

12. "it’s better than what I expected"

Takes a big man to concede a point to the other side in an argument. I appreciate that of Mr. Krugman.