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Supercommittee Failure and Stimulus

November 22, 2011 - by Donny Shaw

While the failure of the supercommittee may be a good thing for long-term deficit reduction, it’s not great for what Congress should really be working on — supporting the economic recovery in the near term. There was some hope that if the supercommittee reached a deal, it would include an extension of some of the fiscal stimulus measures that are set to expire at the end of December. With no deal, the route to sustaining these measures is more difficult, and that threatens the small gains in employment we’ve seen in recent months.

Set to expire on December 31 are two provisions that Congress has put in place to cushion the economic damage caused by the financial crisis — extended unemployment insurance and the payroll tax holiday. Besides providing support for people who have lost their jobs or seen their wages decrease, these are the two most stimulative policy options Congress has at its disposal. According to a report last week from the Congressional Budget Office, “policies that would reduce the marginal cost of adding employees or would be targeted toward people who would be most likely to spend the additional income would have the largest effects on output and employment. Those policies include reducing employers’ payroll taxes and providing aid to the unemployed.”

Even though these two policies are supported by President Obama and most congressional Democrats, Republicans have supported both of those programs as recently as last year. But as the 2012 elections approach, they’re determined to not do so again. At this point there is essentially one option for the Democrats to keep these policies from expiring. On December 16, Congress’s appropriations that fund the government are set to expire. After Thanksgiving, Congress will have two weeks to pass a new appropriations bill to keep the government up and running. That deadline gives the Democrats a chance to use the leverage of a government shutdown to force the Republicans’ hand.

But the Republicans aren’t going to accept an extension of fiscal stimulus without getting something for themselves. They’ve made it pretty clear what they want. Each time Congress has been faced with passing new appropriations to prevent a shutdown, House Republicans have attempted to attached dozens of policy riders on issues like abortion, gun rights, Guantanamo Bay, and much more. Essentially, the Republicans have been attaching variations of all of the social issues legislation that they’ve passed in the House this year that have zero chance in the Democratic Senate.

It’s conceivable that the Democrats could give Republicans some of their social riders in exchange for extending unemployment insurance and the payroll tax holiday. Of course, it’s also possible — perhaps even likely — that no deal will be struck and these programs will simply expire. If that’s the case, 6 million people be cut off from unemployment insurance in 2012 and all taxpayers will see their bill go up, by $900 on average according to the Tax Policy Center. Those changes will put some serious negative pressure on demand for good and services and steer our cyclical unemployment situation back in the wrong direction.

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