Wieffering: Now isn't the time to kill tax cut, benefits for jobless

Here's a topic to toss around the dinner table this Thanksgiving, even though it wades into the dangerous territory of economics and public policy.

Congress must soon choose whether to kill or keep two programs that cost the U.S. Treasury about $155 billion: A national payroll tax holiday that quietly boosted the take-home pay of working Minnesotans by $2.3 billion this year; and extended unemployment benefits for those out of work longer than half a year.

As you know, money is tight. So, which do you think is better for the economy and thus most worth continuing in 2012?

Careful, this is one of those trick questions. Your answer is likely to reveal as much or more about personal values as about your knowledge of economics, because the impact to the economy if either were to end would be roughly the same.

An end to the reduction in payroll taxes would subtract 0.5 percent from gross domestic product in 2012, while failing to extend unemployment benefits would cause a separate 0.3 percent decline, according to J.P. Morgan Chase & Co. chief U.S. economist Michael Feroli.

By the bigger-bang-for-your-buck standard, extended unemployment benefits is the clear winner. It cost $44 billion, while the tax cut cost $110 billion.

Still, I'm guessing that most people would choose the tough-love route and pull the plug on extended unemployment benefits.

More than two years after the end of the recession, it's become increasingly easy and even popular to blame the unemployed for their plight. There are plenty of jobs to be had, this line of thinking goes, but too many people who would rather collect a government check than punch in for an honest day's work.

Republican presidential candidate Newt Gingrich summed up this sentiment earlier this month, when asked during a debate if he favored extending unemployment benefits. "I don't think people should get paid for 99 weeks to do nothing," he said.

This is nonsense.

Nearly 400,000 newly out-of-work Americans applied for unemployment benefits last week. Barring a sharp upturn in the economy, more than half of them should expect to be out of work for nine months, which is 13 weeks beyond the expiration of most state unemployment insurance programs. These people will scramble to right-size their lives as they try to live on a government check that can't be more than half their average weekly pay, and in no case can exceed $597 a week.

In Minnesota, slightly more than 106,000 people are collecting a weekly unemployment check averaging $355. Nearly half them have been out of work for more than six months. Nationally, 3.5 million long-term jobless receive aid under either the Emergency Unemployment Compensation or Extended Benefit program. About 17 million have received checks under the programs since 2008.

Some studies (see www. startribune.com/a834) suggest that job search urgency increases as the end of unemployment benefits approaches. But a more current analysis (www.startribune.com/a835) by University of California economist Jesse Rothstein estimates that extended benefits increase the unemployment rate by a scant 0.2 to 0.6 percentage points.

In short, there's little evidence that unemployment benefits make people lazy. They cushion the blow of losing a job at a time, at least in Minnesota, where there are three job seekers for every posted job opening. Ending the benefits would dent consumer spending and lead to additional job losses.

While the unemployed need the money more, now is not the time to end the payroll tax cut either. Instead, with the economy showing signs of modest growth, it would be a perfect time for Congress to double down with a calculated bet to spur job creation.

Right now, the payroll tax holiday applies only to workers, and it comes in the form of a reduction in their share of the Social Security tax, from 6.2 percent to 4.2 percent. For someone who earns $50,000 a year, that amounts to a $1,000 pay raise.

Employers also pay a 6.2 percent Social Security tax. Reducing it for new hires only, to 4.2 percent or even 3.2 percent, might provide enough incentive for them to increase their pace of hiring, which would help shrink the cost of providing long-term unemployment benefits.

Continuing both programs, and expanding one to include employers, will add to the national debt at a time when public sentiment is clamoring for just the opposite. But this is one case where the cost of ending these programs would prove more expensive than we can calculate.

ericw@startribune.com • 612-673-1736