Web Chat: Congressional Battles as the Year Ends

With the end of the session near, Congress still has a long “to-do” list that includes possible extensions of the payroll tax break, the Bush-era tax cuts and unemployment benefits.

As Senate Majority Leader Harry Reid threatens to keep his chamber in session, and the House schedule remains uncertain, will Congress simply push all its problems into the next year? What are the potential economic implications of last-minute work on these issues, or of pushing them down the road? On December 14, Adam Looney took your questions in a live web chat moderated by POLITICO.

12:30 Comment From Francis: Payroll tax cuts continue to be a hot topic of discussion. Generally speaking, are they a good use of resources in today’s tight fiscal environment?

12:34 Adam Looney: Virtually all American workers pay the payroll tax, so a payroll tax cut reaches millions of workers and raises their weekly take-home pay. According to the Congressional Budget Office it’s one of the most effective ways to boost economic activity.

12:34 Comment From Tony: Critics of unemployment insurance argue that these benefits encourage people to remain unemployed instead of getting back to work. What do you think of this argument—could extending UI benefits actually increase the unemployment rate?

12:39 Adam Looney: Economists have spent a lot of time studying how much unemployment insurance benefits lengthen the duration of unemployment and raise the unemployment rate. The basic answer is not much. For instance, the new issue of Brookings Papers on Economic Activity includes a paper by Jesse Rothstein that suggests that recent extensions of unemployment insurance benefits to 99 weeks have increased the unemployment rate by only 0.2 to 0.6 percentage point. So absent extended benefits the unemployment rate would be 8.0-8.4 percent instead of 8.6 percent—not much different.

12:40 Comment From Don: If UI benefits are not extended, who will be hurt?

12:42 Adam Looney: If UI benefits are not extended close to 1.8 million unemployed workers will lose benefits starting in January. Those workers come from every state and include many workers that have been laid off as recently as July.

12:44 Comment From Anne: What are the key differences between a payroll tax cut and the new jobs tax credit that was floated earlier this year?

12:49 Adam Looney: One difference is that the payroll tax cut applies to basically all workers, while a new jobs tax credit would only apply to new hires or to increases in wages paid to workers. This tends to make the payroll tax cut more costly in the sense that it applies to a larger number of workers—if you wanted to give a cut of $1,000 per worker, there are a lot more existing workers than new hires. But this can also make a new jobs tax cut more efficient in the sense that the tax cut is directly targeted towards hiring.

12:50 Comment From Alex: Mitch McConnell said on Fox News Sunday that unemployment benefits and food stamps are being denied to the wealthiest Americans in recent legislation. Logically, one wouldn’t expect the wealthy to be lining up for unemployment or food stamps. Was this really an issue—the wealthy applying for unemployment benefits—or is McConnell making things up? Have people who don’t need these benefits applied for such in the past? That sounds like taking advantage of the system, at the expense of those who actually need these benefits.

12:55 Adam Looney: Technically, I believe that the eligibility requirements for unemployment insurance are based on whether you paid into the UI system by working and paying employment taxes and then whether you lost your job for economic reasons. So technically, it’s plausible that you could have been fired from a $1 million job and applied for UI. But in practice, this is not a big issue because there are not many millionaires, not many millionaires are losing their jobs and not many choose to claim the UI benefit, which would actually be a small fraction of their income. So I don’t think this is a major issue.

12:56 Comment From Mat: If high unemployment is a symptom of the disease, is UI part of the cure or just a band-aid? Should we be focusing on the cure instead?

1:00 Adam Looney: The major issue is weak aggregate demand—consumers aren’t buying, businesses aren’t hiring and so job opportunities, let alone good job opportunities, are hard to find. According to the CBO, extending UI benefits is the best way to increase demand because the unemployed are likely to spend the money quickly, so that directly addresses the problem. But in addition, it is a band-aid—the purpose of UI is to insure families against the risk of losing a job and help pay the rent and put food on the table. That’s pretty valuable too, independently of being good for overall economic activity.

1:00 Vivyan Tran: Thanks for the questions everyone. We’ll be back in January!