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Austerity Can Wait

Greg Ip:

Fiscal policy: Austerity delayed: FOR a brief interlude after the mid-terms Americans seemed seduced by the siren song of Germanic austerity. Feeble economy or no, the talk was all of rising taxes, pay freezes and spending cuts. Austerity will have to wait.... Barack Obama and Republican and Democratic leaders in Congress struck a deal on a massive new package of stimulus and tax cut extensions, worth some $800 billion next year alone (around 5% of GDP)....

[T]his is good news for the economy: the prospect of inadvertent fiscal tightening was the biggest cloud hanging over the 2011 outlook.... The package comes in two parts. The first is an extension of all of George Bush’s tax cuts for the next two years. Mr Obama acquiesced to an extension for the upper 2%, bowing to the reality that he did not have 60 votes in the Senate to extend only the cuts for the lower 98%. Tax credits for child care, education and for low-income wage earners are also extended for an additional year. The second part is an injection of short-term fiscal steroids: a two-percentage point cut in the Social Security payroll tax for workers for one year, worth $120 billion (that’s double what Mr Obama’s “making work pay” credit was worth), one year of complete expensing of business equipment, worth $200 billion, and a 13-month extension of emergency unemployment insurance benefits.... While the stimulative boost next year is probably worth some $800 billion, or roughly 5% of GDP, the 10-year cost is lower largely because tax deferred by accelerated business investment expensing will eventually be paid....

It is... a depressing reminder that for all the talk of a new era of austerity in America, politicians here still find it easier to give money away than to take it back.... Thoughtful economists, including those advising Mr Obama, think the ideal fiscal package would couple short-term stimulus with medium-term consolidation. We got the first in spades tonight, but there is still no sign of the second.... A debt crisis has never been likely for America, much less imminent. But it looks to me that while the odds remain low, they went up tonight. By putting off the expiration of the tax cuts to the month after the next presidential election, the negotiators have again set us up for another nail-biting collision between the economic and political calendars. Hopefully the markets will remain as tolerant as they have so far.

That the package isn't paid for over ten years is a real shame. And I have to figure out whether it is really $800 billion.

But if it is this has to count as a big win for Obama.

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