A key paragraph from Mark Zandi's economic analysis:
It is ... important to note that growth will be slower in 2012 than previously anticipated, as the fiscal drag expected in 2011 is pushed off another year. The deal will also encourage businesses to pull investment forward into 2011, to the detriment of investment in 2012. The economy will end up in about the same placeas measured by GDP, jobs and unemploymentby mid-2013.
Krugman cites Zandi and concludes that the tax deal will lower Obama's re-election chances:
[W]hat we know from lots of political economy research Larry Bartels is my guru on this is that presidential elections depend, not on the state of the economy, but on whether things are getting better or worse in the year or so before the election. The unemployment rate in October 1984 was almost the same as the rate in October 1980 but Carter was thrown out by voters who saw things getting worse, while for Reagan it was morning in America.
Put these two observations together and what you get is that the tax-cut deal makes Obama’s reelection less likely. Let me repeat: the tax cut deal makes Obama less likely to win in 2012.
The payroll-tax cuts look like the Bush tax cuts in reverse. By slapping an expiration date on the cuts, the Obama administration got twice as much as they otherwise would've (Making Work Pay, the tax cut being replaced, was only half size of the payroll-tax cut in 2011). And just as it was very difficult to let the Bush tax cuts expire, it'll be very difficult to let the payroll-tax cut expire. So the likely outcome here is that Democrats got $240 billion of payroll stimulus rather than $120 billion. That sounds good for Obama's reelection.
Republicans could, of course, try to let the payroll-tax cut expire. But then, as they've admitted, they'll be raising taxes in an election year. And nobody likes to do that.
Ryan Avent likewise believes Krugman is in the wrong:
Deceleration is not the same as "getting worse". And neither is decelerating growth the kiss of death. Take Mr Krugman's own example of the election of 1984, in which Ronald Reagan triumphed. Real GDP growth in that cycle actually peaked in the second quarter of 1983more than a year before the electionafter which it steadily slowed. From that 9.3% performance, growth tumbled to 3.3% by the fourth quarter of 1984, when voters actually went to the polls.
The second point to make is that according to Mr Bartels, it's income growth, rather than GDP growth, that really matters. And for income growth, the level of employment is clearly important; in a tighter labour market wages rise faster than in a slack market. On this score, the tax cut plan delivers. The level of employment is substantially higher with the deal than without it, and the unemployment rate is 8.4% in 2012 with the package compared to 8.7% with no package.
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