Democrats in Congress are basically supportive of the American Jobs Act. So it’s curious that so many of them are actually opposed to its biggest piece: the expansion of the payroll tax cut into 2012 at a higher level.

House Minority Leader Nancy Pelosi (D-Calif.) on Friday backed President Obama’s plan to extend and expand a payroll-tax holiday, despite liberals’ concerns that the move will damage Social Security.

Pelosi said said that, despite the opposition from many in her caucus, “there’s a comfort level as to what [the extended tax cut] will achieve.”

“We’ve pretty much gotten to a place where there’s general acceptance that that’s going to be part of the initiative,” Pelosi told reporters in the Capitol. “This is, again, a compromise. The president feels very committed to it. … It fits comfortably in what he is proposing.”

A long list of liberal Democrats have hammered Obama’s plan to extend the 2011 payroll-tax holiday for another year, through 2012. The lawmakers warned that such a move steals from Social Security funding and threatens future senior benefits.

There are a few things going on here. First, there’s the question of whether a tax-side program like this is actually effective, whether it works to stimulate the economy. Second, there’s the question of whether the expansion – particularly to the employer side of the payroll tax, with even stronger cuts for aggregate hiring or wage increases, makes sense. And third, there’s the question of whether continuing a cut to the payroll tax, and having to repay the Social Security trust fund out of general revenue, undermines the Social Security program.

I’ll take these in reverse order. On the undermining of Social Security, this is a dog which so far hasn’t barked. The Administration could get just as much out of a Making Work Pay tax cut that could provide the same amount of extra money to weekly paychecks without raising this question of Social Security at all. And maybe that would be preferable. But I haven’t heard one argument made by anyone that Social Security is now being paid out of revenue, and that this means we have to slash it to bring the program into actuarial balance. Republican hands aren’t clean on the initial payroll tax cut, because they accepted it as part of last year’s Bush tax cut deal. So they haven’t pressed this forward. If the payroll tax NEVER gets reinstated, then you have a problem. But temporary suspensions of a portion of them replaced by general revenue? This has not yet undermined the program in any way. Heck, Rick Perry is scrambling to explain his comments about Social Security being a Ponzi scheme, and he doesn’t even bring this up. There’s ample reason to believe that Tea Party types don’t see Social Security as an entitlement but an earned benefit, and they aren’t interested in trying to bring about its destruction.

Now, does that mean we should expand the cut to the employer side? I think the evidence that employers will use the savings on labor costs to hire more people is completely unfounded. Bigger corporations are sitting on lots of cash and don’t have much reason to spend it, because there isn’t a ton of demand in the economy. This seems like a supply-side solution to a demand-side problem. It’s designed a little better than normal, with more credit for job hiring and wage increases, but I don’t see this as a terribly useful measure.

That said, it’s not as big a tax cut, because it’s limited, as the $175 billion that would be spent on the employee side (the White House’s estimate on the employer side is around $65 billion). So, does the employee-side payroll tax cut work?

It’s been in place for almost a year now. Obviously this hasn’t been a great year for the economy. The premise behind the payroll tax cut is simple: it essentially mimicks a wage increase for workers of about 2%, giving them more money to spend. But in the first half of the year, that money went increasingly toward paying for higher commodity prices like food and fuel. Of course, unless you see a correlation between the tax cut and the increase in food and fuel prices, the effect was to avert a worse outcome for consumer spending.

Christian Weller argues that a gradual wage increase like what’s seen in the payroll tax cut will help with reducing household debt, a crucial part of the crisis:

It’s true that many workers are likely to initially save at least part of the extra money in their paycheck that will appear as a result of a payroll tax cut. That will ultimately help solve the problem that has been the greatest drag on national growth: The enormous debt that burdens middle class households.

It’s important to realize that the real reason consumption has been increasing at only a modest rate is that many families are working hard to lower their debt loads rather than continue to spend like they used to. And with good reason. The middle class is still trying to rebuild trillions of housing and stock market wealth lost during the financial and housing crises in 2007 and 2008. Middle class wealth diminished precipitously because of the drop in house values and stock portfolios, but families still owed the mortgages they borrowed against those houses to finance their spending during the good times [...]

In the next several years, however, faster deleveraging won’t be possible unless incomes grow more quickly. (Faster income growth helps deleveraging since leverage is the ratio of debt to income: As long as income is increasing, in other words, leverage falls, even if total debt stays the same.) Total after-tax income has indeed grown since the recession officially ended in June 2009, but at a very low 4.8 percent. More typical income growth of ten percent for a period of seven quarters would have brought down families’ leverage below 109 percent; normal income growth, in other words, would have already naturally lowered leverage by about the same amount that it would take current American families, with their strenuous saving, to accomplish in a year’s time.

Raising income growth, then, is the necessary condition to getting families out from under their crushing debt burden and to getting the rest of the economy back on track: It’s only private deleveraging that can speed up the return of healthy growth and steady job creation. The alternative is that household debt will continue to put a drag on consumer spending increases and job growth, regardless of what other stimulus measures we devise.

I agree to a an extent, but I can’t get the chart out of my head that shows productivity and growth diverging in the late 1970s, never to return to balance. It’s certainly possible that employers take advantage of things like payroll tax cuts to deny wage increases with productivity, allowing the tax cuts to act as a substitute. That puts us no better off – really just with a more weakened federal Treasury – than before.

I find the deleveraging argument compelling too, however, and think that pulling back on the payroll tax cut at this time would, in theory, cut back on growth. Perhaps the biggest consequence of moving forward with this, however, is that it uses conservative ideas to try and solve problems rather than liberal ones which are more proven. This President has cut taxes more than George Bush did, regardless of the fact that he is never perceived that way. Direct spending on job creation has a higher multiplier and is better for the economy than these tax-based solutions. In addition, the constant tax-side efforts put the economy in a greater hole that invariably could get filled by squandering the New Deal/Great Society legacy.