By PAUL KRUGMAN
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In return for this bad stuff, Mr. Obama got a significant amount of short-term stimulus. Unemployment benefits were extended; there was a temporary cut in the payroll tax; and there were tax breaks for investment. Incidentally: how, exactly, did we get to the point where Democrats must plead with Republicans to accept lower corporate taxes?
Unemployment benefits aside, all of this is very much second-best policy: consumers would probably spend only part of the payroll tax break, and it’s unclear whether the business break would do much to spur investment given the excess capacity in the economy. Still, it would be a noticeable net positive for the economy next year.
But here’s the thing: while the bad stuff in the deal lasts for two years, the not-so-bad stuff expires at the end of 2011. This means that we’re talking about a boost to growth next year — but growth in 2012 that would actually be slower than in the absence of the deal.
This has big political implications. Political scientists tell us that voting is much more strongly affected by the economy’s direction in the year or less preceding an election than by how well the nation is doing in some absolute sense.
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Surely the answer to both questions is yes. And that means that Mr. Obama is, as I said, paying for the release of some hostages — getting an extension of unemployment benefits and some more stimulus — by giving Republicans new hostages, which they may well use to make new, destructive demands a year from now.
moreKlein cites an earlier post by Krugman in which he makes the point: "On the straight economics, the tax deal is worth doing." Krugman goes on to argue, as he does above, that it could be bad for President Obama's re-election.
By Ezra Klein
Paul Krugman
thinks the tax cut deal might hurt President Obama's reelection chances. To understand his argument, you need to see
this graph from political scientist John Sides, which tests presidential election outcomes against income growth in the preceding four years and income growth in the year of the election:
Basically, election-year income growth matters much more than total income growth. Krugman's
concern is that some of the provisions in the tax cut package -- namely the unemployment benefits and the payroll tax cut -- expire in 2011. That'll either make Obama desperate to cut a deal with the Republicans to extend those provisions -- setting up another hostage-taking situation -- or it'll allow the provisions to expire, which will make voters somewhat worse off in an election year.
I read the issue the other way: The payroll-tax cuts look like the Bush tax cuts in reverse. By slapping an expiration date on the cuts, the Obama administration got twice as much as they otherwise would've (Making Work Pay, the tax cut being replaced, was only half size of the payroll-tax cut in 2011). And just as it was very difficult to let the Bush tax cuts expire, it'll be very difficult to let the payroll-tax cut expire. So the likely outcome here is that Democrats got $240 billion of payroll stimulus rather than $120 billion. That sounds good for Obama's reelection.
Republicans could, of course, try to let the payroll-tax cut expire. But then, as they've
admitted, they'll be raising taxes in an election year. And nobody likes to do that.
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