The main way that the US can insulate itself from the crisis in Europe is through continuing the fiscal state of emergency in the country, as the only ballast for growth. Unfortunately, we have a dysfunctional Congress, so the only way to realistically do this is to not slip backwards and turn fiscal policy negative by allowing several measures to expire at the end of 2012.

Congress comes back to work with the option of extending the payroll tax cut and unemployment benefits to those out of work over 26 weeks, in addition to other traditionally expiring measures like the doc fix, the AMT patch and other tax extenders. In normal times, at least some of these measures could be absorbed by the system. But the economy is weak and fragile, and there’s a giant storm cloud coming from Europe.

Complicating this is the fact that Republicans think the road to the White House goes through economic pain, and they want to facilitate that by not allowing anything that could marginally improve the economy to pass Congress. The LA Times reports that there is actually some hope for a deal, at least on the payroll tax, but there’s reason to view that skeptically:

The Obama administration has asked Congress to extend payroll tax cuts set to expire at the end of the year, and also to renew unemployment benefits. The tax-cut extension could cost the Treasury an estimated $112 billion, but if it lapses American workers will see an immediate tax increase on Jan. 1 that would cost a typical family $1,000 per year.

Democrats plan to propose paying for the extension with a surtax on millionaires, which Republicans oppose [...]

But both parties are hesitant to let the payroll tax cuts expire for fear of how it would affect consumer spending and confidence. At least two senators said Sunday that lawmakers might seize the moment to come up with a larger plan to preserve the tax cuts and reduce deficits.

“I believe this is a contrarian view, but we have a good chance of actually getting the big package, big deficit reduction in 2012,” said Sen. Charles E. Schumer (D-N.Y.) on NBC’s “Meet the Press” (video below). “The pressure on both parties to come together in the middle … is going to be stronger and stronger. Second, the Republican primaries will end; right now the Republican primary pushes the candidates and then their Senate and congressional supporters to the right.”

He added: “But once you get a nominee, they have to move to the middle.”

The Times claims that Pat Toomey echoed this, but all I see is that he said moderate Democrats may want to work out a debt deal next year. The tax cut expires next month. Toomey added that “I think that probably some package of that with other features might very well pass,” but didn’t say what those other features were.

Jon Kyl, who is retiring and doesn’t even have to face voters anymore, offered the more likely Republican response, perpetuating the lie that taxes on millionaires hurt small business (apparently solely) and showing mock-concern for Social Security’s finances, which are intertwined with the payroll tax. Grover Norquist talked himself into allowing the cut to expire by saying that it was pitched as a holiday and therefore should end, while adding that the Bush tax cuts did have a sunset but were pitched as permanent so they must never end. There are any number of reasons to oppose a payroll tax cut, and Republicans are sure to use all of them.

There are some safety valves here. A package that didn’t tax millionaires to pay for the payroll tax cut has a better chance of passing. There’s that budget savings from drawing down wars that is available. But that would have to come with something cherished by conservatives for them to go along with it. Maybe the pressure by the medical community on a doc fix is enough to include that in a package. Maybe additional corporate tax cuts are the answer. I’m not saying it’s impossible to see a payroll tax deal (less so on unemployment insurance, which is really a tragedy). But anything that helps the economy will be viewed by Republicans as suspect.