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Payroll Tax Deal Sets Tone for Election-Year Finances

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With the payroll tax deal, Democrats and Republicans finally found some common ground -- namely, that they are both willing to pander in an election year.<

A joint committee of the Senate and House of Representatives last week reached an agreement in principle on a measure that would extend both a payroll tax break and unemployment benefits. This agreement still needs to be voted on by the full House and Senate, but if passed it should be popular because it will keep money flowing to tens of millions of Americans. The price will be paid in the future -- and the future is a constituency which has little voice in the immediacy of an election year.

The proposed agreement would keep unemployment benefits extended far beyond their normal 26 weeks, and continue a $100 billion partial suspension of payroll taxes that pay for Social Security benefits. There is generally a tendency to pass feel-good measures in an election year, and politicians would be very reluctant to do anything that might impede a fragile economic recovery. While preserving that recovery is a legitimate concern, neither extending unemployment benefits or continuing the payroll tax break should be viewed as an untarnished victory:

The move to extend unemployment benefit comes at a time when job growth is improving. It targets special relief for high unemployment states, but given the disparity of unemployment rates among states, shouldn't people be encouraged to move to where the jobs are?

While people may love the payroll tax break, they shouldn't forget that the tax was there for a reason. They may find out what that reason was when their Social Security checks come up short somewhere down the line.

Feel-good measures may be inevitable in an election year, but in this case they raise the question of when the economy will be deemed healthy enough to be weaned off its stimulus dependency.

Stimulus dependency

The payroll tax break and extension of unemployment benefits were originally positioned as temporary measures to get the economy through a rough patch. Now, a series of rolling extensions have demonstrated that even temporary measures can be difficult to discontinue.

The same is true of low interest rates. Though the argument can be made that low interest rates on savings accounts and other income-generating vehicles has taken money out of the economy, the Federal Reserve has not only stuck to its low interest rate stance, but has made a multi-year commitment to it.

It's difficult to foresee when politicians and policy makers will have enough confidence to unwind the artificial stimuli that have been built into this economy. Again, those who will pay the price someday -- such as future Social Security recipients -- will generally have their voices drowned out in the present. It may be up to a constituency of those hurt by artificially-low interest rates -- people with savings accounts, money market accounts and CDs -- to start to put some pressure on Washington.

The original article can be found at Money-Rates.com: "Payroll tax deal sets tone for election-year finances"