The Good & Bad of Obama - Republican Tax Cut Deal

Mark Zandi, an economist I respect, tells Ezra Klein is enthusiastic about the Obama-Republican tax cut deal.

"This will make a difference," he says. "It will add a lot to growth in the first half of next year, when the recovery will be at its most vulnerable. It really seals the deal for the recovery evolving into a self-sustaining economic expansion."

Unemployment will be extended. That is good. Unemployment benefit are stimulative. These people aren't going to spending money on vacations in the Bahamas, contrary to what Republican elected officials may believe. People unemployed have to spend money on groceries, rent, etc. The unemployed will be putting money back into the economy.

Where people may be confused is unemployment is not extended for people unemployed for over 99 weeks (the 99ers) will get no extension. The extension merely means unemployment benefits will be budgeted in the 2011 budget. States decide the length unemployment can be collected. The federal government provide federal money to help the states pay unemployment benefits.

The bad news is President Barack Obama got unemployment benefits money that Republicans would have had to place in the 2011 budget. Republicans don't want to be on the side against unemployment benefits during bad economic times. What Obama and Republicans failed to do is provide unemployment benefits for people that have been out of work for two years. The job market is extremely difficult right now. It is difficult for people to get transportation money to go to several interviews a day. It is also difficult for people to buy new clothes for interviews. The unemployment rate is much higher than reported by the Labor Department. Unemployment might actually be up to 15 percent. Unemployment data doesn't record the 99ers (people unemployed over 99 weeks).

An example of how horrible Obama is at messaging is misleading.

Now, if that’s the standard by which we are measuring success or core principles, then let’s face it, we will never get anything done. People will have the satisfaction of having a purist position and no victories for the American people. And we will be able to feel good about ourselves and sanctimonious about how pure our intentions are and how tough we are, and in the meantime, the American people are still seeing themselves not able to get health insurance because of preexisting conditions or not being able to pay their bills because their unemployment insurance ran out.

The tax cuts compromise does not address people whose unemployment benefits that have run out. These people will hear Obama's words and think the President is going to give them unemployment benefits. The policy details matter. Obama either doesn't know how his compromise addresses unemployment benefits or he he overstating the deal he made.

Zandi told Klein he expects positive stimulus results from the small businesses being allowed to make 100 capital investment deductions.

His estimate is higher than, say, the estimate from Macroeconomic Advisers (they put it at an extra half-a-percentage point in 2011) because he thinks the provision to allow businesses to deduct 100 percent of the costs of new investments in 2011 will be more effective at spurring business spending than most analysts currently predict. "I think we’ll see a big pop from it next year," he says.

My understanding is that the deduction will be used for businesses buying machinery. I am not sure if the deduction will be allowed for other fixed assets, such as land or buildings. There is no official bill yet. If the deductions include land and buildings than we may see more small businesses starting up. Considering the shape the economy is in it is a good tax deduction proposal.

Getting the economy back on track takes priority over the federal deficit. The deficit will not be reduced while millions are unemployed or underemployed. However, there is a fiscal headache on the horizon. The way Obama and the Republicans handled the tax cuts deal is an indication they don't have the stomach to seriously deal with the deficit. Congressional Democrats had two years to solve the Bush tax cuts issue and punted. The Bush tax cuts debate is proof Washington's leadership does not have the resolve to deal with the deficit maturely.

Earned income credit will be in the tax cut package. EIC will help poor people with children. However, I can't believe that this was something that Obama had to compromise on. The Bush administration had EIC. It is a mainstream and popular tax deduction. Word is there increase in EIC tax benefits.

I have heard a conservative argue the estate tax to 35 percent will create jobs. Republicans have made repealing the so-called death tax a religious conviction. There was no estate tax in 2010. Congress allowed the estate tax to elapsed. In the big scheme of things this isn't a huge deal. Joe Rosenberg of the Tax Policy Center estimates the revenues lost at around $55 billion. I don't like it, but I wouldn't hold up unemployment extensions to get the estate rate up to 45 percent.