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Link Payroll Tax Holiday to Unemployment Rate

Author: Peter R. Orszag, Adjunct Senior Fellow
June 30, 2011
Bloomberg.com

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Today's fiscal policy debate straddles two divides: one between those who support jobs and those who favor austerity, and one between those who think additional revenue is needed and those who don't.

On the first divide, both sides are right, because the truth is that the U.S. needs both jobs and austerity -- and a combination would be more powerful than either piece by itself. We face a very weak labor market now and, over the medium- and long-term, an unsustainable fiscal path. It would make sense to combine an additional round of temporary job creation measures with a substantial amount of permanent deficit reduction that would be enacted now but take effect later.

The economy remains weak after the bursting of the credit bubble 2 1/2 years ago. In 2007, total private sector borrowing amounted to roughly 28 percent of gross domestic product. By 2009, it was 17 percent of GDP. History shows that economies take substantially longer to recover from this type of financial crisis than from other shocks. Yet we continue to be surprised that our expectations for growth are not realized. (Our two biggest Charlie Brown moments thus far were in late 2009-early 2010 and late 2010-early 2011.)

What's most likely ahead is a prolonged period of relatively slow growth, less than 3 percent per year (The International Monetary Fund shares this outlook.). And, unfortunately, that means the unemployment rate will decline only very slowly, if at all.

 

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