U.S. tax deal puts austerity on back burner

December 7, 2010

Fiscal austerity may be coming to America, but it probably won’t be arriving any time soon. President Barack Obama and Republican leaders have agreed to some $1 trillion of economic stimulus over the next two years, mostly in the form of tax cuts (or non-increases). If the package makes it past Congress—and especially past Democrats—the message will be that, for now, Washington is going for growth.

If only by accident, the politicians seem for once to be doing at least some of what many economists are recommending, including Federal Reserve Chairman Ben Bernanke. While America has longer-term deficit and debt problems, they argue now is the time for stabilizing the economy and planning ahead rather than cutting. With unemployment high, the more immediate concern is boosting a flaccid economy that has yet to find its legs a year and half after the last recession officially ended.

The latest compromise may help do that, and crucially it has a realistic shot at passing Congress. Earlier this year, the Congressional Budget Office rated a list of short-term stimulus options by their ability to boost growth and jobs. It turns out many of the best options are in the deal reached by Obama and the Republicans: a 13-month extension of unemployment benefits; a one-year reduction in employee payroll taxes; and allowing full deduction of business investments in 2011.

That said, the heart of the package is in a form that may provide little near-term oomph, according to the CBO’s models. That’s the two-year extension of President George W. Bush’s 2001 and 2003 labor and investment income tax reductions, at a cost of $500 billion in lost revenue. But Republicans were never going to budge on that. Besides, letting those taxes go back up could have dented such economic growth as there is.

Of course, congressional Democrats could scuttle the deal. Some are steaming about Obama’s agreement to extend the Bush tax cuts for the wealthiest taxpayers as well as the middle class—rewarding Republicans, as some see it, for intransigence. But time was against Obama if he wanted stimulus in any form, and he may be betting that the hoped-for positive impact on job creation will silence grumblings in his party.

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