I have to chuckle at Ron Klain’s story about the subtle genius of the Obama Administration with respect to the payroll tax cut. Ron Klain was IN the Obama Administration. He was Joe Biden’s chief of staff for two years. This is like someone with the pen name “Larack Lobama” praising the President’s negotiating skills.
Specifically, Klain credits Timothy Geithner (and Gene Sperling, then an advisor to Geithner) with coming up with a strategy that turned a one-year payroll tax cut into what looks to be a two-year one. He takes us back to the negotiations over the Bush tax cuts at the end of 2010. The White House couldn’t enact their preferred policy, to just let the tax cuts above $250,000 in income expire. So they wanted to create a bargain where all the tax cuts got extended, but the White House got something in the exchange (Ending all the tax cuts, Klain writes, “risked causing economic upheaval at a delicate time in the recovery”).
As the deal took shape, the White House pressed for more than $2 in tax relief for the poorest for each $1 provided to those on the high end. Tax credits for college tuition and child care were included in the package to help hard-working families. But the largest win for the president was going to be a two-year extension of the Making Work Pay credit worth more than $100 billion. This targeted measure that Obama had campaigned on in 2008, and won passage of in the Recovery Act in early 2009, was good policy, progressive and efficient. It gave a tax cut of $400 to $800 for individuals with an income below $75,000 and couples earning as much as $150,000. Yet very few Americans knew they were getting it or understood how it benefited them.
It was at this point that Geithner and Sperling put forward an alternative: The president could sacrifice the extension of his own Making Work Pay provision and instead propose a measure that had previously enjoyed bipartisan support: a 2 percent cut in the payroll tax. This plan offered some advantages:
First, while more than 80 million families had been benefiting from Making Work Pay for two years, the fact that almost no one knew about it limited its effectiveness as an economic boost and meant there was little public support for its extension. A 2 percent payroll tax cut, by contrast, would be understandable, visible and more likely to resonate with taxpayers. It would be strong medicine, economically and politically.
Second, while it would take two years to inject more than $100 billion into the economy via Making Work Pay, a 2 percent payroll tax cut would put that much money in people’s hands in just one year. That offered a quicker jolt to the economy, and a more substantial one over a given time period than Making Work Pay, thus achieving important economic policy goals for the administration.
OK, the second point is ridiculous. The remedy for using Making Work Pay to get more money to workers quicker is to double Making Work Pay. It was a $400 benefit; just make it an $800 benefit. If you like, raise the cap (Making Work Pay phased out around $85,000 of salary) so more workers benefit from it. As for the first point, I’d say the ignorance over Making Work Pay is a total failure of the Administration implementing Making Work Pay. And, let’s remember, it was a DESIGNED failure. Enthralled by behavioral economics, the Administration didn’t want to tell anyone they were getting more money in their paychecks, hoping that people would just spend a bit more and the benefits of a better economy would rub off on them. There was no showmanship around Making Work Pay, no understanding that the tax cut was brought to you by your federal government. In fact, there was no showmanship around the payroll tax cut until this month, when it neared expiration.
Klain pushes the idea that Geithner and Sperling knew it would be difficult for Republicans to object to extending the payroll tax cut. There’s no reason why it wouldn’t be similarly difficult to object to extending a beefed-up Making Work Pay. The President would have been able to make the exact same points – “millions of working families will wake up on January 1st with a tax increase unless Republicans act” – and the dynamic would have been exactly the same. The only difference is that you would have ended up with a better-targeted tax cut with a higher economic multiplier, and you wouldn’t have involved Social Security one iota.
I’m supposed to “give Geithner a fresh look” because of this. Today, Geithner’s Treasury Department refused to label China as a currency manipulator, an act that would have supported the entire domestic manufacturing industry and created far more jobs over time, in a sustainable fashion, than a temporary tax cut. So forgive me if I don’t slather Geithner in praise.