In December 2010, when the payroll tax cut was first signed into law, the unemployment rate was 9.4 percent. In February 2012, when the payroll tax cut was extended through 2012, the unemployment rate was 8.3 percent.
Today, the unemployment rate is virtually unchanged, at 8.1 percent. And yet, both parties agree that the payroll tax cut should be permitted to lapse — meaning that both agree this is a good time for a $920 tax hike on the average family.
This might make sense if the economy had entered a period of self-sustaining recovery where private demand was both cutting into the unemployment rate and poised to continue cutting into the unemployment rate. But that’s not happening. The labor market is stagnant.
The weirdness — and, some would say, cruelty — of the political system’s thinking is thrown into sharp relief by the recent actions of the Federal Reserve. After reviewing the last year of economic data, Ben Bernanke and Co. chose to increase the level of monetary stimulus and promised to sustain that stimulus beyond the initial signs of the recovery — no more being fooled by false dawns or forcing the market to worry about whether the Fed would yank its support. Eleven of the 12 members of the Federal Reserve’s Board voted in favor of this policy, and the market rallied upon hearing of it.
Conversely, the Congress and the White House aren’t simply resisting the calls to increase the amount of fiscal stimulus in the economy. They’re literally taking stimulus away. I’d like to say that what’s happened here is they’ve looked at the economic data and have come to the opposite conclusion as the Federal Reserve. But I don’t think there’s any evidence that this move is the result of a thoughtful process based on economic forecasting. Rather, the various players seem tired of fighting over the payroll tax cut and antsy to move onto deficit reduction. It’s not “mission accomplished” so much as “mission too hard, let’s try something easier.”