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Posted at 11:45 AM ET, 12/ 8/2010

What the tax deal is likely to do to the economy

By Ezra Klein

Macroeconomic Advisers -- one of the leading economic forecasting firms -- runs the tax deal through their model:

There are three major components that we had not assumed [in our 2011 baseline], and that would, in fact, together significantly impact the economic outlook over the next few years. First is the extension of emergency unemployment compensation through December 2011. In total this would add roughly $56 billion to personal disposable income through early 2012. Second is the one-year, two-percentage-point payroll tax reduction for employees that would add approximately $120 billion to disposable income in 2011. It should be noted, however, that the administration dropped its proposal that the Making Work Pay refundable tax credit be extended permanently, something we had also assumed in our forecast. Therefore, the net effect on disposable income in 2011 is only roughly $60 billion, relative to our forecast. Third is the new expensing and bonus depreciation through 2012 that would reduce corporate taxes by roughly $170 billion through 2012, with roughly $140 billion of that subsequently recaptured by the federal government because of smaller depreciation deductions in later years.

Based upon what is currently known of these three key proposals, our preliminary analysis suggests that GDP growth in 2011 would be boosted by roughly ½ to ¾ percentage point. This is on top of the 3.7% growth of GDP anticipated for 2011 in our recently published forecast. Growth in 2012 could also be expected to be several tenths of a percentage point higher, with modest drag on growth in 2013, as the temporary provisions expire.

By Ezra Klein  | December 8, 2010; 11:45 AM ET
 
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Next: The GOP's next hostage: The full faith and credit of the U.S. government

Comments

Sounds good.

There was a great article about how Obama got nearly 50% of the >$100k salary vote in 2008.

In 2010, the Democrats got barely 40% of that vote.

People are fed up with class warfare!

Posted by: krazen1211 | December 8, 2010 12:15 PM | Report abuse

I wrote this on your previous post:

"Treasury yields have already risen a quarter point on the ten-year to about 3.20. Today's 1 PM auction will be tremendously important, though you won't even notice it.

JP Morgan has already raised their budget shortfall outlook for the fiscal year to 1.5 trillion, from 1.25 trillion.

So to make a long story short, all the numbers you have played with in the last two days you can throw out, because we have to factor in new, and currently unknown borrowing costs, AND to re-evaluate the rise in the 10 year's influence on mortgage rates and it's effect on housing/construction employmnet, the area that could possible see the biggest increase in jobs, OR the biggest lag."

I forgot to mention that one side effect of the agreement was the Republican refusal to negotiate an extension of the Build America Bonds program. This expiring progrma is little known but very important. In it's simplest terms for brevity this was a program that lowered the cost of state and municipal bonds, because Federal subsidies covered about 35% of interest costs. Without this, we have to factor in more costs for states and muncipalities and greater risks of tax increases or defaults at those levels.

Posted by: 54465446 | December 8, 2010 12:22 PM | Report abuse

Assuming Bond Market is not spooked and Tea Party does not go for shutting down the Government now that the whole world knows that Obama would accept compromise when hostage takers are ready to harm hostages here - American People.

The problem Obama needs to solve here is to be politically skillful in letting people know who are hostage takers. In the tax deal if Obama would have been blunt from start that 'giving tax credits to rich is the holy grail for GOP at the cost of anything else'; he would not have got any deal at all when GOP is marred so much. GOP does not mind being marred now because they have got what they needed.

Obviously, this is going to be a problem in all further hostage situations too. Which means that practically Obama has to enter into these situations without anything needing 'badly' for Progressive or Democratic cause. Because then only he will be able to point a finger at hostage takers and show Americans who is liable for the mess.

Will the Base do that? Now that 'candor and explaining compulsions of Oval Office in Presser is an Obama innovation' will he be so plain speaking and upfront with his base?

Again remember, in the end 'anger of Base' is not about substance but not treating them like an adult. It will be far better if Obama tells the base - 'if you want the fight, don't come to me asking anything, be ready for not getting anything in next 2 years'. Come on Barack, speak up and come on Base, 'man up'.

Posted by: umesh409 | December 8, 2010 12:23 PM | Report abuse

Assuming Bond Market is not spooked and Tea Party does not go for shutting down the Government now that the whole world knows that Obama would accept compromise when hostage takers are ready to harm hostages here - American People.

The problem Obama needs to solve here is to be politically skillful in letting people know who are hostage takers. In the tax deal if Obama would have been blunt from start that 'giving tax credits to rich is the holy grail for GOP at the cost of anything else'; he would not have got any deal at all when GOP is marred so much. GOP does not mind being marred now because they have got what they needed.

Obviously, this is going to be a problem in all further hostage situations too. Which means that practically Obama has to enter into these situations without anything needing 'badly' for Progressive or Democratic cause. Because then only he will be able to point a finger at hostage takers and show Americans who is liable for the mess.

Will the Base do that? Now that 'candor and explaining compulsions Oval Office in Presser is an Obama innovation' will he be so plain speaking and upfront with his base?

Again remember, in the end 'anger of Base' is not about substance but not treating them like an adult. It will be far better if Obama tells the base - 'if you want the fight, don't come to me asking anything, be ready for not getting anything in next 2 years'. Come on Barack, speak up and come on Base, 'man up'.

Posted by: umesh409 | December 8, 2010 12:27 PM | Report abuse

Sorry for the repeat comment (blame it on WaPo SW for not refreshing properly...)

Posted by: umesh409 | December 8, 2010 12:29 PM | Report abuse

JP Morgan has also forecast a .5% rise in GDP because of the tax cuts (source: Neil Irwin). <- 54465446

DB is a little higher, .7% I believe (source: Business Insider).

@Chris_Gaun

Posted by: chrisgaun | December 8, 2010 12:29 PM | Report abuse

This is a great plan if you're a Republican--give up a bit of unemployment for most of the tax cut fantasies they want, knowing that when these cuts are set to expire there will be a Republican Congress to renew them. Then if Obama tries to veto he will get endlessly hammered for "raising taxes." They just want to cut taxes endlessly in order to "starve the beast," as they say, which really means slashing SS and Medicare.

Posted by: AuthorEditor | December 8, 2010 12:41 PM | Report abuse

chris gaun:

That's right, this is a really huge chemical experiment, conducted in some ways by the equivalent of a high school chemistry class with an absent teacher.

Nobody knows what happens next after you hear someone say "let's see what this stuff does to it".

Posted by: 54465446 | December 8, 2010 12:58 PM | Report abuse

Now Ezra, this is in line with Krugman's paltry estimate. Krugman uses the long established in economics, Okun's Law (but really it’s a rule of thumb approximation from empirical experience, not a law). Okun's law says that when employment is slack, for every one percent increase in GDP, the unemployment rate drops by half a percent.

Here they forecast that GDP will be higher by 1/2 to 3/4 of a percentage point in 2011, so unemployment would be lower by 1/4 to about 1/3 a percentage point in 2011.

And in 2012 GDP will be a few tenths of a percentage points higher, so unemployment maybe 1/10th of a percent or 1/5th of a percent lower.

This is right in line with Krugman's back of the envelope calculations (You don't mess with the Krugman).

And let's keep in mind, the Fed may stimulate less due to this and the almost one trillion added to the debt, so these paltry numbers may be a lot less, even zero or negative.

So I ask you again Ezra, considering the many factors involved, do you really think this deal helps Obama's chances in 2012, or hurts them? And this is obviously the crucial thing, as $900 billion is well worth paying if it prevents a Republican president in 2012; then trillions in tax cuts are going to the rich anyway, as well as more Supreme Court Justices who think corporations are people, and on and on.

Posted by: RichardHSerlin | December 8, 2010 1:27 PM | Report abuse

Richard Serlin:

That's funny. I have been doing this a long time, I have never seen Krugman quoted outside a general interest newspaper, or Democratic administration. In other words, on Wall Street, where it counts, Krugman has no influence whatsover.

Posted by: 54465446 | December 8, 2010 1:40 PM | Report abuse

"And let's keep in mind, the Fed may stimulate less due to this and the almost one trillion added to the debt, so these paltry numbers may be a lot less, even zero or negative."

One of the most important factors when considering fiscal stimulus is what the Fed will do (or not do) in response. The spring of 1933 (leaving gold) showed what monetary policy could do (+57% surge in industrial production in 4 months) even in a depressed, deflationary economy.

Posted by: justin84 | December 8, 2010 2:10 PM | Report abuse

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