What a difference a year can make. Last January Republicans swaggered into Washington full of vim and vigor ready to cut spending, reduce regulations and roll back the Obama agenda. But by the end of December, the federal debt had increased by $1 trillion in 10 months, and Republicans were demanding a one-year extension of unemployment benefits and the payroll tax holiday—two longtime Democratic proposals—when the Dems were willing to settle for only two months.
What happened? President Obama sucker punched them. He caught them off-guard—as he had been doing for pretty much the whole year.
Let’s start with the payroll tax cut. For years Democrats have recognized that income tax cuts don’t help the bottom half of earners because they pay little or no income tax. So they railed against tax breaks for the rich while demanding a cut in payroll taxes.
Some Republicans liked the idea because they think any tax cut is a good tax cut. But many Republicans, along with a number of Democrats, had reservations because the Social Security payroll tax pays current retirees’ benefits—or at least it did. The underperforming economy has reduced payroll tax revenues, and so there aren’t enough funds coming in to pay current expenses.
And it will only get worse—much worse. The payroll tax holiday reduced payroll tax revenues by about $110 billion in 2011, so the government has to draw on general revenues to make up the difference. But since it already borrows about 42 cents of every dollar it spends, the government doesn’t have any extra revenue. To their credit, Republicans proposed freezing federal pay levels to help cover the costs, but Obama nixed that idea, so he won again.
Now it appears—and really, who didn’t see this coming?—that the “temporary” payroll tax holiday will likely become permanent, and even grow. Obama masterfully used the issue in December to accuse Republicans of wanting to raise taxes on the middle class—completely ignoring its “temporary” origin—while refusing to raise taxes on the wealthy.
The president proposed increasing the cut to 3 percentage points—a reduction from 6.2 percent of a worker’s income to 3.2 percent, rather than the 2-percentage point reduction of 2011. And he flirted with the idea of a reduction in the employer’s 6.2 percent contribution. Both proposals were scrapped for the two-month agreement, but they’ll be back. This whole sham will turn into a bidding war of “I’ll see your tax cut and raise another reduction.”
What Obama is doing is stealthily delinking, and maybe defunding, Social Security and its trust fund. That will likely make it easier in the future for Democrats to call for higher taxes on the rich. Then Republican objections to tax increases won’t be hurting just the middle class, in Obama’s telling of the story, it will be robbing seniors of their promised retirement income. Will Republicans stand firmly against tax increases when “they’re for our seniors”?
Even if Republicans wanted to turn the delinking and defunding of the Social Security Trust Fund into a call for personal retirement accounts, there is no way to divert a worker’s Social Security payroll tax to a personal account if there’s no payroll tax.
Stranger yet is Republicans’ embrace of the unemployment-benefit extension. Republicans used to oppose the unprecedented extension of unemployment benefits from 26 weeks in most states to 99 weeks. That’s because most economists agree that generous unemployment benefits tend to exacerbate the unemployment problem.
As New York Times and liberal economist Paul Krugman points out in his macroeconomic textbook: “Public policy designed to help workers who lose their jobs can lead to structural unemployment as an unintended side effect. . . . In other countries, particularly in Europe, benefits are more generous and last longer. The drawback to this generosity is that it reduces a worker’s incentive to quickly find a new job.” Remember, that’s Krugman.
But Republican opposition was soooo last year. House Republicans now want to extend unemployment benefits for a year—past the next election—when Dems are willing to stop with two months.
Of course, given the sorry state of the Obama economy, and the fact that millions of Americans have been unemployed or underemployed for months, one can and should be sympathetic with workers’ inability to find jobs.
But Republicans have gone from criticizing the unemployment-benefit extension as both unaffordable and bad policy to complaining that the Democrats don’t want to extend it long enough. Yes, two-month policy extensions are a bad idea, but that’s better than 12 months of bad policies. Democrats have Republicans promoting their agenda, and taking credit for it.
Does that sound like the Republicans who rolled into Washington a year ago eager to get the country’s fiscal house in order? No wonder we’re facing another trillion dollars in debt—and counting.