In A Zero Lower Bound Recession, A Payroll Tax Cut Is Not Stimulative
The Obama Administration wants to extend the temporary payroll tax cut it brokered with Mitch McConnell in December 2010 (it was part of the infamous Deal that extended the Bush tax cuts.) While some like Ezra Klein hailed this initiative as great stimulus, the record is mixed at best. Bruce Bartlett writes:
[T]here is no evidence that the lower payroll tax has done much of anything to stimulate either spending or hiring. There are a number of reasons for this. [. . .T]he tax cut only helps those with jobs. While many have low wages and undoubtedly are spending all their additional cash flow, those with the greatest need and most likely to spend any additional income are the unemployed.
[. . . E]ven if one assumes that the cost of employment has declined and employers can somehow capture some of the payroll tax cut, there’s little sign that labor costs are the principal factor holding back hiring. The main one is a lack of sales, as monthly surveys by the National Federation of Independent Business document. In the latest survey, 23 percent of businesses said poor sales were their No. 1 problem and only 4 percent cited the cost of labor.
(Emphasis supplied.) I'm not sure why the lack of demand in a zero bound recession is not recognized as the problem here by the VSP in this country. The issue is how to stimulate demand. For this purpose, spending, by the government, is what is required. It seems clear no one wants to understand this. Bartlett writes:
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