Until very recently, many members of Congress were anxious to marry any increase in federal expenditures with budget cuts to offset them. That changed suddenly as leaders in the House and Senate agreed to arrangements that would extend unemployment benefits and payroll tax cuts, as well as drop provisions to pay doctors less for services they provide under Medicare. Republicans apparently got a minor concession for agreeing to the large compromise. There will be modest changes to federal pension payments. Overall, the deal is a signal that perhaps Congress realizes austerity alone will not solve either the deficit problems or the trouble with restarting the economy.
One theory shared by many economists is that an increase in payroll taxes will remove money from consumer accounts and put it into the Treasury. In the process, these experts say, the consumer will have less to spend and that will hurt GDP improvement. Whether most members of the House and Senate agree with that exactly is not as important as the fact that the consumer portion of the economy will have a chance to expand because of their votes.
The theory about unemployment benefits has similarities to one about personal income taxes, in that people who lose benefits completely can no longer be consumers. The federal government may save money at first, but the economy overall will pay a price. The more people who cannot consume, the worse off many American businesses will be. Those businesses pay taxes, but they will pay fewer if their profits fall.
The reasons for Congress’s decision may be almost entirely political rather than economic. Republicans may want to avoid a public fight over whether they have robbed Americans of income these people need to maintain their current economic status, which has been eroded already by a lack of pay increases going back several years. Democrats could have claimed they wanted to help financially struggling citizens while Republicans did not.
In the end, the reasons for the compromise are not as important as the fact that they add stimulus to the U.S. economy at a time when a recovery has begun but is still tentative.
Douglas A. McIntyre
Take This Retirement Quiz To Get Matched With An Advisor Now (Sponsored)
Are you ready for retirement? Planning for retirement can be overwhelming, that’s why it could be a good idea to speak to a fiduciary financial advisor about your goals today.
Start by taking this retirement quiz right here from SmartAsset that will match you with up to 3 financial advisors that serve your area and beyond in 5 minutes. Smart Asset is now matching over 50,000 people a month.
Click here now to get started.
Thank you for reading! Have some feedback for us?
Contact the 24/7 Wall St. editorial team.