Payroll Tax Cut As Stimulus

One cornerstone of Obama's jobs plan is a $120 billion payroll tax cut. This tax cut has been enacted already for 2011 and according to Obama, the claim is this tax cut put an average $1000 into worker's pockets.

This is a tax cut that reduced those Social Security contributions, what you see as FICA, the social security component, on your W-2, by 2% for 2011. That's right, they defunded social security by 2% for 2011.

Social security is calculated on gross income, normally 6.2%. This is why attacking social security is almost a crime. You've actually been putting money into your benefit your entire working life. It's capped to a wage base and for 2011 it's $106,800.

Additionally, median income is a tad misleading, for it's household income, on aggregate, instead of individual income. Additionally, it's not median wages, which since social security is a regressive tax, affecting wage earners disporportionately, using median income to estimate the tax benefit isn't quite right. After all, most of us are have nots, the median wage for 2009 was $26,261, much lower than the household median income of $49,777 for 2009.

First off, one might notice that 2011 hasn't been too good so far. We've had a 0.4% Q1 GDP and now a 1.0% Q2 GDP and job growth has been below 90,000 for the last four months. In August job growth was a zero, with an official 9.1% unemployment rate.

The Urban-Brookings Tax Policy Center estimated the payroll tax benefits. While the average benefit was $934, the lowest income quintile, representing 65.6% of all income earners, only received $178 a year from the payroll tax holiday. Considering personal consumption expenditures were over $10 trillion in 2010, and are roughly 70% of GDP, that $178 in pocket hardly seems to make a dent.

Even more obvious, a tax cut does not create a job directly, at least not one which puts $178 in the majority of income earner's pockets. The cost was projected to be $67.2 billion in 2011 and over 10 years, $111.7 billion.

Not much bang for the buck, since a boost to consumer spending will primarily be done by the ones living paycheck to paycheck. People who already have money to spare are more apt to simply save the money or pay down debt.

The above figures are in nominal, or not adjusted for inflation as well. From the CPI report, gas alone increased over 33% in a year, so any additional pocket cash went right into the gas tank.

Supposedly the employee side payroll tax rate 2% reduction would add 0.5% to annual GDP, or roughly $75 billion, and gain 400,000 jobs. But this is nominal GDP, not real, or adjusted for inflation. Additionally, if inflation rises or worse, we get yet another steep rise in energy or food costs, we have a very expensive stimulus taking up the slack from getting robbed at the pump.

How one claims an employee side payroll tax holiday increases jobs is due to increased consumer spending and that never ending infamous GDP multiplier. The rough thumb in the air rule is a 2-3% increase in annual GDP reduces the unemployment rate by 1%. This rule is also known as Okun's law. If I apply the above stimulative effect estimates to the current unemployment statistics, 400,000 less unemployed would have lowered the unemployment rate to 8.9% from 9.1%. Not a huge difference.

So, the question becomes why do this at all? One never knows but there are reports Obama has put reductions to Social Security and Medicare benefits on the table for draconian cuts, with the excuse of shared sacrifice in order to reduce the budget deficit.

But in terms of jobs, seems we would be better off hiring as many people as $120 billion can cover at $25/hr. Hand 'em all government issued scissors and put 'em out on the White House lawn as maintenance crew1. So what we displace a few goats. We need the jobs man.

1$25/hr is $50k a year. At the estimated $120 billion, that's $50k full time jobs for 2.4 million people. Scissors for 2.4 million people are $5 million. We'll assume the grass is free.

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Comments

Scissors.. Please!

Excellent analysis of President Zero's Bull$#!t excuse for plan. I can't look at him anymore, send Mrs' Zero out to give the BS speech, short tight dress please. Much more of Zero's BS and I'll need the scissors to cut my wrists.

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Odin

rate up this post for me then

You see that arrow on the upper left? Only registered users can see it and it's your vote to put posts onto the front page. I don't care about series (links, FMN, SMC) being front paged because those are more for fun or to capture all of the beyond belief news, writings that happened which we couldn't get to here or someone else researched much better.

I checked my calculator on this post a good 3 times for each number, for I frankly couldn't believe the numbers I was actually getting. Talk about 6 ways to Sunday to boost the economy and the fact it will underfund social security, which is clearly under attack, I found particularly odious.

But with the trillions dumped on the excuse to boost economic growth, I think they could have hired all of America and given them 6 figure salaries by now. That's the point of Keynesian economics, to boost aggregate demand, domestically, which is why funds need to go to the lower wealth sectors of the nation, the people and why direct jobs programs work too.

Just like the WPA and CCC creates so many incredible public works, the Hoover dam, the GG bridge, electricity for E. Texas, implies they are way more bang for the buck as stimulus. I'll try to look at multipliers for these New Deal Era type of programs and write that type of thing up. Obviously a multiplier of 1.24, 1.3 and even 1.5 simply isn't worth it. (tax cuts have multipliers of 0.8 and such, really a waste).

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Uprated

The fainting goats, although unnecessary for uprating, were definitely worth a look. Sadly, immediately reminded me of the Democratic Party response to criticism by Republicans, Corporations or Conservative demagogues of any stripe or extremity.

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analysis round up after speech

I'll be hunting for other credible economists analyzing this, but so far, I feel this is really about destroying social security. Anywho, any serious economic analysis, by someone who gets GDP multipliers and runs through the numbers, leave a reference link so I can include it in a round up.

This post conclusion was fairly shocking for me as well for Republicans are the ones who pointed out this is a bad idea and I just naturally blow off everything they say due to their "agendas" which usually do not make macro economic sense.

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Solution to SS underfunding is to decrease revenue? Insane.

It makes absolutely no sense to hear pundits/politicians/economists... preaching about how Social Security is underfunded, while at the same time CUTTING Social Security tax!

If Social Security is underfunded, obviously the LAST thing we should be doing is cutting taxes. Instead, the $106,800 wage base should be increased.

When it comes time to re-instate the 6.2% rate, Republicans will call this a "tax increase" just as they did with the Bush tax cuts.

Wage earners are getting accustomed to the 4.2% rate and working it into their budgets. It was only meant to be temporary and the longer it stays around the harder it is going to be to put it back to 6.2%.

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You don't understand

Obama came to office talking about taking on the difficult task of reforming entitlements. He didn't say much during the campaign, but he immediately started talking about it once elected. It seems that he has embraced the corporate Republican theme of dismantling Social Security because it's too expensive, which it isn't. Thus the theme of "shared sacrifice" mentioned by Robert Oak. As a Democratic Party President, Obama is aware that he's in the position to successfully lead the Republican charge to gut Social Security. How you achieve that is secondary, whether it's through the decimation of its funding base or through a Super Committee that is tasked with hollowing out benefits. The Republicans have been trying to do this for decades and now at last they're succeeding. Why Obama is so enamored of their militaristic feudalism is quite beyond me. He says that he's "for jobs" and he's concerned about unemployment and the working people of this country. But his woefully inadequate actions at every step of the way (vetoing essential health regulations on ozone was yet another job destroying decision) make it clear to me that woefully inadequate reflects either a fundamental lack of interest or it's a design feature (or he's a candidate to take the most idiotic Harvard graduate award away from GWB).

Robert Oak noted in his post that the benefits will be minimal in terms of impact on the economy, but what he didn't mention is that the knock-on effects could be significant, not the least of which is increased joblessness and reduced economic growth, the exact opposite of the plan's intent. How so? As people recognize that the money they were counting on for their retirement isn't there or will be greatly reduced, they will try to increase savings for retirement, cut back on spending (decreasing PCE) and stay in the workforce longer. That means fewer jobs and increased competition for jobs, which means increased unemployment. Young people are already having considerable difficulty landing jobs and I can guarantee you it will get worse once the effects of cutting social security benefits become apparent. More savings means increased money for the banks, which will be spent in whatever manner maximizes management bonuses. I can guarantee you that does not include lending into a declining economy. Speculating on commodities and derivatives is more probable/profitable. But that lack of investment means lower growth or declining GDP, leading to fewer jobs, etc.. Social Security was one of the most successful of many programs passed by Roosevelt during the Great Depression to alleviate the effects of that economic calamity. Now we're in the Greater Depression as some have called it or the Great Recession, and the Obama Administration is doing the exact reverse. Wonderful. Is there an exit to this madness?

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