This May Not Help...Much

There was a useful article in Monday's edition of The Wall Street Journal (free content at this writing) that discussed a pending deal in Congress. It would trade a temporary extension of the Bush era tax cuts temporarily for an extension of unemployment benefits. On the surface, this would seem to be a great example of classical Keynesian economic policy.

However, there are a number of additional directions you can go with this. One can use the fact that the extension of tax rates is temporary and that people know this. Essentially, they are being told that taxes will go up in the not too distant future. Consequently, what is the likelihood that people will spend the extra money vs. saving it to offset future tax increases? Does it make a difference that we are in a recession? Does the incentive to save differ for those who are still struggling - perhaps with part-time work because they can't find a full-time job? If you're still unsure about your job going forward, how will that impact your decision to spend vs. save?

As for the extension of unemployment benefits, there has been research that indicates the length of time the benefits are available has a connection to duration of unemployment - the longer the benefits period, the longer the duration of unemployment. Other economists believe that people who are unemployed try to seek employment quickly - even at lower wages or positions that would previously have been unattractive.

For either tool, a case can be made that passage will help the economy. And a counterargument can be made that it won't. At the moment, the discussion is basically academic because nothing has been passed. But that makes it a perfect intellectual exercise – lots of room to play. And as neither side is planning on cutting other programs to pay for what being proposed, it will add to the deficit. You can even begin discussion of "crowding out." What do you think?