With the government putting less money into the economy and taking more out of people’s wallets, many economists estimate that these changes could reduce growth by at least one percentage point and leave at least 1 million more people jobless.
While economists and politicians have been warning about the dangers of the fiscal cliff, far less has been said about the more modest, yet serious, toll that these other government actions would take.
Of these, the biggest impact would come from the expiration of the temporary payroll tax cut, enacted in December 2010. Since then, the payroll tax that funds Social Security has been 4.2 percent, down from 6.2 percent, giving the average family an extra $1,000 to spend.
The disappearance of unemployment benefits would also hamper economic activity, especially because recipients usually spend most of the cash on food and other goods rather than saving the money.
Meanwhile, upper-income earners would see a slight increase in the taxes they pay under President Obama’s health-care law.
Finally, under an agreement forged last summer, the government is required to trim about $60 billion from domestic and defense spending next year.
Together, these changes could do at least as much to slow the economy as any other government action in the past half-century, according to Moody’s Analytics.
Coming out of the recent recession, it was inevitable that the government would eventually curtail policies that had been enacted to stimulate the economy. But some economists say it doesn’t make sense for the government to retrench while the economy remains fragile.
“The weakness of the economy means that 2013 is not a good year for any tax increase or spending cut,” said Joseph E. Gagnon, senior fellow at the Peterson Institute for International Economics and a former top official at the Federal Reserve. “Tax increases and spending cuts hurt the economy. So do them when the economy is healthy, not when it’s weak.”
Neither the White House nor leaders in Congress are calling for an extension of payroll tax cuts this year. Treasury Secretary Timothy F. Geithner said earlier in the year that they should not be renewed.
Still, the issue could be revisited after the election, when Congress will enter a period of furious fiscal negotiations. A White House official said the president wants the extension of unemployment insurance at the end of the year and would take a look at the payroll tax cut as part of a host of issues to be discussed after Nov. 6.
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