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Monday, December 6, 2010

Well, looks like we avoided a sharp fiscal contraction


That payroll tax cut in particular is an immensely expensive, and therefore stimulative, provision. On the other hand, all talk about a sharp fiscal contraction to be more fiscally responsible just went right out the window. This is a statement by the US Congress that they do not give a damn about the deficit.

The good news is that this lays the groundwork for a decent year economically next year. That payroll tax cut provides some real oomph for consumer spending and to businesses. I'll be curious about the impact on the Social Security trust fund, but that's another discussion. Of course, this raises my concerns about the long term deficit and debt picture. Tax rate reductions are more permanent in their fiscal effect than spending increases. Spending can much more easily be frozen at current levels than tax rates can be increased. In that sense, it is much easier to work off the deficit impact of spending measures than tax rate cuts.

Tax rates will have to be revisited soon if there is to be any serious discussion of the deficit.

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