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Obama’s “New” Deal

Yeeees, pun intended! Let’s have a look at the possible economic consequences of that deal:

– Bush tax cuts will not end in 2011: Letting taxes increase certainly would have had a negative effect on growth, if it were not for the huge budget deficit. At this point, it’s hard to tell what matters more, bringing deficits under control or having low taxes. Consumption should increase with lower taxes, but people tend to save more if they fear the consequences of huge government debt. This is certainly still an open field to economic research.

– Extending unemployment insurance: Also hard to tell… It certainly is not going to increase incentives for the unemployed. See Mankiw.

– Temporary Social Security tax cut: As Mankiw writes, the decision to cut the employees’ side of the payroll tax is wrong if you want an economic recovery that provides more jobs (’cause jobs don’t become cheaper for companies when their part of the tax stays put). Instead, you get the same-ol’ consumption stimulus that Americans have become used to during the last 30 years or so. Furthermore, a 1-year tax cut is certainly not doing much to the benefit of the economy. I predict the additional income will be saved instead of consumed, since households still seem to deleverage.

All in all, this deal may do nothing to speed up the recovery. Instead, it may even increase unemployment. Probably nobody will remember this deal in ten years from now. It will be forgotten, like all the other useless attempts to stimulate the economy during the last 3 years.

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