November 26, 2011

POLITICIANS CONSTANTLY search for the magical convergence of good policy and good politics. President Obama thinks that he has found it: his plan to extend the cut in the employee share of Social Security payroll taxes, from 6.2 percent of pay to 4.2 percent, that Congress enacted a year ago.

Over the past year, the measure put nearly $1,000 in an average worker’s pocket, which may have bolstered economic growth by enabling consumers to keep spending. Extending the tax reduction another year, or even increasing it, as the president proposes, could protect against a double-dip recession. One forecasting firm, Macroeconomic Advisers, estimates that letting the cut expire Dec. 31 would reduce growth in gross domestic product by 0.5 percent and cost 400,000 jobs by the end of 2012. The president proposes to offset the extension’s $110 billion estimated cost by increasing taxes on upper-income Americans over the next 10 years.

So the tax cut would be productive, progressive and paid for — what’s not to like? And Mr. Obama gets to cast himself as an advocate for the middle class, while attacking Republicans, who have equivocated on the plan, as hypocrites and defenders of the rich. “Are they really willing to break their oath to never raise taxes, and raise taxes on the middle class just to play politics?” he asked a campaign-style gathering in Manchester, N.H., on Tuesday. Mr. Obama clearly relishes turning the tables on the GOP: “Tell them, ‘Don’t be a Grinch.’ Don’t vote to raise taxes on working Americans during the holidays,” he urged the crowd.

Still, the payroll tax-cut extension is not without risks. Any additional growth that the president’s plan achieves comes at the cost of future growth — if it’s really paid for with future tax increases.

And there’s a risk that this “temporary” measure will become permanent. Seem implausible? Consider a partial list of “emergency” programs still with us: the Federal Reserve’s massive balance sheet expansion and near-zero interest rates; the federal takeover of Fannie Mae and Freddie Mac; the Treasury Department’s ownership of stock in General Motors, AIG and Ally Bank; elevated loan limits under the Federal Housing Administration. Today’s wasteful farm subsidies began as a temporary rescue during the Great Depression.

If the economy underperforms again in 2012 or even performs as the relatively gloomy forecasts suggest, Mr. Obama’s arguments today might be equally valid in a year’s time. Then what?

Cutting payroll taxes depletes the trust fund out of which Social Security benefits are paid. This has always been a bit of a myth; through intra-governmental transfers, current general revenue finances current benefits. But the more you reduce the ostensible flow into the trust fund, the more transparent the myth becomes, and the clearer to the public, that Social Security is, indeed, an income-transfer program, not social insurance. The case for treating it as a sacrosanct entitlement for seniors would be correspondingly weakened. This, too, must be counted among the risks of Mr. Obama’s plan.