There is much that I do not like about the new bipartisan deal on tax rates. One of those things is the extension of unemployment-benefit spending without compensatory cuts elsewhere in the budget. I think unemployment insurance is one of the better social safety-net programs, but that $56 billion still has to come from somewhere. There’s a $161 million NEA budget, the $600 million a year that ethanol subsidies put in the pockets of BP alone, $16.5 billion in 2010 earmarks . . . that failed $50 billion foreclosure-prevention program would have just about covered it. It’s not like there are no cuts to be made.
What is worse is this: It is yet another product of consumer-driven economic policy, premised on the mistaken belief that robust consumer spending, which is alleged to (but does not) account for 70 percent of the nation’s economy, is the key to recovery. Buying stuff does not make you rich; making stuff makes you rich. Investing in the capacity to make stuff and provide needed services makes you rich. What does the tax deal do for people who want to save and invest their money in productive enterprises that create real wealth and real jobs? Not much.
The payroll-tax holiday will probably mean that the average American family goes out to dinner once a month more often: If a guy earning $50,000 gets a temporary income boost of $84 a month for two years, that is walking-around money. If you want to put some cash in Americans’ pockets, better to give them the whole $2,000 at once — they might use it for something more useful, like paying off a credit card (or catching up on a late mortgage payment or two). They might even pop it in an investment account, which would be an excellent use of the money. Dribbling it out means it will get dribbled away, which is counterproductive.
Nobody is launching a new business or hiring a full-time employee on a temporary 2-point payroll-tax cut. What about the people who are in a position to make large investments and create new enterprises? If anything, this deal makes their lives even more complicated: It uglies up the fiscal picture, further complicates the tax code, and necessitates another tax fight in 2012. Which is to say, it increases uncertainty. As Edmund Andrews and Jim Tankersley put it over at National Journal:
Those who place high importance on being able to plan ahead—corporations planning billion-dollar capital investments or individuals deciding how much of their income to save or spend—still don’t know what to expect two years down the road.
There is room in politics for these kinds of piecemeal, go-along-get-along deals — I advocate them on spending cuts, for example: A nearly perfect scenario would see Republicans trading $1 in cuts reducing spending on things that they like for $1 in cuts to spending Democrats favor — lather, rinse, repeat, 1.4 trillion times or so. But there is a deeper problem that is not getting addressed: All of this effort to pump up consumer spending is the crystal meth of economic policy, a collection of short-term feel-good measures that serve mostly to camouflage deeper problems in the economy. We are directing our efforts at spending — at the depletion of savings and capital — rather than measure to encourage the accumulation of savings and capital, which is to say, at investment. Real investment only comes from real savings — forgoing present consumption for future gains — but that takes a deeper policy game and a time horizon longer than two years.
Meaning, do not expect this to do a lot of good. I have my differences with the supply-siders on some specifics, but they are correct on a crucial insight: You treat investment poorly and subsidize consumption, you get less investment, more consumption.
– Kevin D. Williamson is deputy managing editor of National Review and author of The Politically Incorrect Guide to Socialism, to be published in January.