Firewalls against Disaster

Every week is Europe’s most important week yet of the Euro crisis and this week is no different. Half-hearted or weak measures continue to fail to stem what looks increasingly likely to result in the worst financial and economic crisis the world has experienced since the Great Depression and years of economic disaster that might make the 2008 financial crisis look like a warm-up.

In the context of this impending doom, it is imperative that United States lawmakers and policymakers take action over the next month to keep the American economy strong enough to survive a large fall in European economic activity. Europe is a vital market for American goods, accounting for 20 percent of all exports, and the largest risk to our economy might be a credit crunch created by the collapse of the European financial system, as Europe is already in the midst of a practical credit freeze and our financial systems are unalterably linked.

The United States vitally needs a firewall against the ever more likely European disaster and lawmakers from both parties are coalescing around an extension of the payroll tax cuts and unemployment insurance, both of which are absolutely essential to provide some strength to the economy.

The payroll tax cut is an employment-focused demand-side incentive that puts money back in the hands of workers. At a time of strained budgets, this money often goes back into the economy in the form of essential spending. Over the last year, the tax cut decreased the employer Social Security contribution on the paycheck from a rate of 6.2 percent to 4.2 percent on the first $106,800 of salary, and Democrats have proposed lowering it further to 3.1 percent. Lowering the employee payroll tax rate to 3.1 percent “would increase GDP by 0.5 percent more than keeping the tax at its current rate,” according to Moody’s Analytics. Arguments that it takes money away from Social Security are unfounded; this is merely an accounting identity, but the government can and does move money from other accounts to ensure Social Security is solvent in event of a payroll tax cut.

As crucial to the economy and the welfare of everyday Americans as the payroll tax cut is the extension of unemployment insurance. Unemployment benefits provide much needed help to those without jobs and given our country’s weak safety net it’s often the only thing keeping many American families from abject poverty. Right now, Congress has allowed up to 99 weeks of unemployment benefits, but if Congress doesn’t act to extend benefits, the maximum length of unemployment benefits will drop to six months and 2.1 million people will lose their benefits by February, resulting in immense suffering for the least fortunate. Those who worry about the benefit extension creating less of an incentive to find a new job clearly have no idea what it is like to be unemployed; benefits are far too small to live with even a modicum of comfort and by no means is living on unemployment insurance a pleasant way to support a family or lead a life.

Not only do these benefits provide urgent help to those most in need, but they are absolutely vital to the strength of the economy. The unemployed are the least likely to have discretionary income, but also the most likely to need it for their daily lives. As a result, money they receive through unemployment benefits is almost entirely spent on food, housing, and necessities, making it one of the most effective methods of stimulus available to the government.

Much of the current debate in Congress is taking place over how to pay for these benefits. Democrats have proposed a millionaire’s tax while Republicans have proposed a federal hiring freeze. The Democratic proposal is reasonable but should ideally be part of a larger progressive overhaul of the tax code. The Republican proposal would be completely counter-productive to the goal of creating jobs and might even make the federal government function more expensively.

Ideally, Congress should not pay for these measures at all and instead engage in deficit spending. Treasury rates have never been lower, and investors will literally pay us to borrow from them. During a time of weak aggregate demand it makes sense for governments to engage in deficit spending to bolster demand. This was true in the Great Depression, true in 2009, and for better or worse, given the fragile state of our economy, still true now.

Mark Zandi of Moody’s has estimated that failing to extend the payroll tax cut and unemployment benefits would result in approximately a one percent loss in GDP growth which would exact an enormous human toll on everyday Americans and compound the problems sure to be created by the European situation and decreasing Asian demand. Congress absolutely must not go home to celebrate Christmas without helping struggling workers and the unemployed, many of whom are in for a very rough winter if these provisions are not extended.

Ravi N. Mulani ’12, a Crimson editorial writer, is an applied mathematics concentrator in Winthrop House.


Recommended Articles