Network News

X My Profile
View More Activity
Posted at 9:29 AM ET, 12/15/2010

The tax deal and 2012 revisited

By Ezra Klein

When political scientists say that elections are all about the economy, what they mean is that elections are all about the direction of the economy. A bad economy that's getting better will do more for an incumbent than a good economy that's getting worse.

Parts of the tax deal -- notably the payroll tax cut -- sunset in 2011. As Paul Krugman has argued, and various macroeconomic models have shown, this means that growth in 2012 is likely to be less than growth in 2011. That is to say, on a year-to-year basis, many Americans will feel things are getting worse. David Shor plugged the growth estimates from the forecasting firm Macroeconomic Advisers into one of the simplest of the models and found that it predicts this will slightly harm President Obama's reelection chances:


"If the tax cuts don't get through Congress," concludes Shor, "President Obama is projected to be a slight favorite for reelection, netting about 50.7% of the two-way vote. If the Tax-Cut deal is implemented in it's current form, Obama can be expected to receive 49.95%."

I don't think that's quite right: The non-deal baseline that Macroeconomic Advisers is using projects that the tax cuts get extended and the Making Work Pay credit becomes permanent. So you're really comparing two different kinds of tax deals, one of which frontloads in 2011, and one of which doesn't. But the basic point is that the administration's deal, which frontloads in 2011, is not well-timed to bolster Obama's chances at reelection. If the payroll-tax cut gets extended into 2012, however, the deal will probably improve the Democrats' prospects.

By Ezra Klein  | December 15, 2010; 9:29 AM ET
Categories:  Political Science  
Save & Share:  Send E-mail   Facebook   Twitter   Digg   Yahoo Buzz   StumbleUpon   Technorati   Google Buzz   Previous: Wonkbook: Senate will vote on tax deal today; House looks to change estate provisions; Admin's housing plans criticized
Next: Deficit hawks vs. deficit frauds


Economic projections are like trying to predict how many hurricanes happen every year.

Few people get them right and those who do are just lucky.

The best one can do is say the economy might improve in the next two years and it might get worse.

The biggest variable to economic improvement is consumer confidence. And that is almost impossible to gauge correctly.

Posted by: lauren2010 | December 15, 2010 10:10 AM | Report abuse

Ezra, you and Krugman have it wrong again. The payroll tax cut is meaningless where it will affect the election, namely in unemployment. The GDP is far less important than the UE. All you have to do is look at the most recent election. GDP has been rising along with a great surge in the stock market, and the D's got shellacked to use the President's term because UE won't come down.

The yield curve is far more important than the payroll tax cut because the only area that can guarantee substantial changes in the UE rate is housing, if it comes back. Many jobs have been substantially outsourced or permanently terminated, but housing jobs can never fall into that category.

You and Krugman were both completely wrong about the unimportance of rising Treasuries, up about 100 basis points from where Krugman said they were unimportant. That has fueled a six month high in fixed rate mortgages.

If you want to know about his re-election, barring any "black swan" events like 9/11, tell me three things. What is the 30 year fixed, a gallon of gas, and a loaf of bread going to be at that time?

Posted by: 54465446 | December 15, 2010 10:11 AM | Report abuse

This is only tangently relevant to the post above, but I have a hard time resisting pointing out the myths embraced by left-wingers when I have the chance.

Some time ago a few of the left-wing mensas on these boards actually tried to argue that only right-wingers ever engage in violent behavior (this was in context of the town halls). People with left-wing views NEVER engage in violence, is what these posters tried to argue.

So whenever I see a story like this one today, I have to at least post a link so left-wingers are forced to look the lies they believe straight in the eye.

By the way, I can easily see this happening in the U.S. in 20-30 years if progressives continue to get their way in marching us toward a Great Nanny State, where leftists create a mentality among the populace that 'the rich' should pay your bills for you....

Posted by: dbw1 | December 15, 2010 10:41 AM | Report abuse

Obama's battles in 2012 will not be with the reality of the economy, but rather with whatever lies and innuendo Faux news and the right-wing slime machine hurl at the vapid electorate...

Posted by: JkR- | December 15, 2010 11:07 AM | Report abuse

I kind of agree with 54465446.

Nothing in this bill will encourage increased employment. Basically, it encourages Americans to buy slightly more of the same crap we are already buying for a short period of time. For useful permanent growth, you either need production demand to exceed current total capacity, or for production demand to change in a way current facilities and/or infrastructure isn't well suited to meet (e.g., a green energy requirement). You don't open a new store because you think it will be economically viable for the next 12 months. More likely, you increase hours at your current store(s), have your staff work a few more hours, or, grudgingly, add some temps for a while.

Posted by: eggnogfool | December 15, 2010 11:23 AM | Report abuse


I was in love right up until you threw in the green energy requirement. I can see now it was just a flirtation.

Posted by: 54465446 | December 15, 2010 11:39 AM | Report abuse

I doubt this naval grazing has any sense or utility.

As others have said, predicting economy is very hard.

Why 2012? If Bond Market continues it's route as it has in last few weeks (on the double punch of QE2 + Tax Cut Deal boosting Economy to normal growth rate of 3-3.5% GDP growth rate and at the same time classic monetization of increased deficit raising possibility of inflation notewithstanding today's tepid inflation report); things can be dire in 2011 itself. Add to it the heightened drama of 'debt ceiling increase' and Obama's trangulation of the same by Tax Reforms (because he has many less options to change the game or at least change the 'talk'). Obviously that is not easy Politics and who cares what happened in waning days of December 2010 at that time? Point is Economy can turn on dime practically for any reasons - oil again threatening above $100 price; overheating Chinese Economy leading to crisis; Europe unable to get its act together; India unable to pass Budget, Dr. Singh Gov collapses and new elections are ordered which means Indian Economy takes back seat; and many other reasons.

Remember Lehman Brothers and TARP? Calm and Steady Hand during that crisis helped Obama most in solidifying his case against McCain. Politics matters and let us not try to shield behind some artificial drapes of economy and so on.

Yes, it was not just Economy which was responsible for 63 seat loss for Dems; but fundamental inability to conduct Politics and moving Public Opinion in right way. I am not trying to undermine the importance of Good Economy for Politics.

But for Politicians Good Economy is the desired goal as it is their job. Politicians who undermine Good Economy for their political fortune are no different than Venezuelan President Chavez; meaning they basically traitors.

Politicians should try to make Economy Good in itself and conduct business of Public Opinion separately. In other words, there is limit to conduct good Politics exclusively in terms of Left Policies or Right Policies. Good Politics is autonomous sphere than Economic happenings.

Posted by: umesh409 | December 15, 2010 11:41 AM | Report abuse

I wasn't advocating a green energy requirement in the post;

if you prefer, I could have used the example of a Top Hat Requirement (THR), where citizens are all required to wear top hats when in public. We don't currently have the facilities to fill the demand for top hats that meet federal top hat criteria that would follow, so new factories and production facilities would open, requiring new hirings, top hat stores would open, etc. A Horse-And-Buggy Requirement, requiring a % of all traffic on roads be performed by horse drawn carriage, would have similar effect.

If there is any real growth due to the increased demand provided by this bill, it will probably be in the form of a few additional factories in China. I have nothing against the Chinese; they make nice stuff. I'm just agreeing with the topic; it seems to me that you should be able to get more for your trillion dollars than bad 2012 poll numbers.

Posted by: eggnogfool | December 15, 2010 12:37 PM | Report abuse

Is it just me or both of those forecasts bad for Obama?

Real disposable income growth of 2.5%/yr basically means unemployment doesn't fall throughout the forecast.

RDI growth from 2001Q1-2008Q2 (over that period we were in recession about 1/6th of the time) was 2.95%. Even including the dreadful last two quarters of the Bush years, and real disposable personal income grew at 2.59% annual rate. In otherwords, we're talking sub-Bush era disposable income growth. Under Clinton, the average was 3.55%.

This forecast suggests Obama will have a 9% unemployment rate either way. At any rate, I think Lauren has it right - economic growth can't be accurately forecast.

Posted by: justin84 | December 15, 2010 12:44 PM | Report abuse

C'mon justin, how about some credit for the man, because that's what I posted just a few days ago that 9% would be about the best that is likely to actually happen. LOL

Posted by: 54465446 | December 15, 2010 3:10 PM | Report abuse


Ok, we can start dating again, but no fooling around until I get a ring out of this or until the 10 year hits 4%, in which case I won't need you anymore!

Posted by: 54465446 | December 15, 2010 3:49 PM | Report abuse


I'll give you credit in '12. As for now, it's all a forecast. That said, I can give you credit for anticipating the market reaction to QE2.

Posted by: justin84 | December 15, 2010 6:58 PM | Report abuse


Thank you:

It's all about the cash!

Did you notice that oil prices actually dropped a few cents today in spite of the biggest drop in weekly inventory numbers in 8 years? That's because the dollar rose again in reaction to European issues. Commodity prices are so divorced from demand right now, except agricultural ones, it's hard to say where this will come out. You know I'm a big Bernanke lover, but it's hard to see this all ending well.

Posted by: 54465446 | December 15, 2010 7:49 PM | Report abuse

Yes, let's continue with borrowing money to goose the economy just in time for the next election. It's worked so well for the last four decades.

Posted by: brickcha | December 16, 2010 10:38 PM | Report abuse

Post a Comment

We encourage users to analyze, comment on and even challenge's articles, blogs, reviews and multimedia features.

User reviews and comments that include profanity or personal attacks or other inappropriate comments or material will be removed from the site. Additionally, entries that are unsigned or contain "signatures" by someone other than the actual author will be removed. Finally, we will take steps to block users who violate any of our posting standards, terms of use or privacy policies or any other policies governing this site. Please review the full rules governing commentaries and discussions.

characters remaining

RSS Feed
Subscribe to The Post

© 2010 The Washington Post Company