11/17/2010 07:12 pm ET Updated May 25, 2011

Reconnecting Job Growth to Deficit Reduction - Part 1

Add Pete Domenici, Alice Rivlin and their colleages at the Bipartisan Policy Center (BPC) Deficit Reduction Task Force to the growing list of eminences in both parties who support cutting payroll taxes to stimulate the economy and jobs. Unlike last week's preliminary proposal from the White House-appointed Simpson-Bowles deficit commission, today's BPC report, Restoring America's Future , calls for a one-year suspension of payroll tax for both employers and employees to stimulate the economy and jobs so it can better absorb deficit-tightening measures.

Whereas the Bowles-Simpson proposal only sees payroll tax as a revenue raiser and proposes to "broaden its base" by raising payroll tax eligibility ceilings (now at about $106,000 of income), the BPC pretty much leads with suspending payroll tax as the first policy step, both in its report and today's Washington Post oped by Rivlin and Domenici.

That's important to note as one more sign of the times among many others that cutting payroll taxation to create jobs has bipartisan appeal and will look increasingly realistic to conservatives and progressives alike as deficit reduction moves up the policy agenda.

Bipartisan commissions risk being least-common-denominator exercises reflecting the narrow intersection of what opposing parties could both support. But the BPC report goes deeper than that and tells some tough truths to both sides. It points out, for example, that

"Some politicians and economists present a false choice: reduce unemployment or stabilize the debt. Restoring America's Future, however, requires that we do both - and begin now."

It also repudiates the idea that we can significantly cut the deficit by either eliminating "waste, fraud and abuse" or, for that matter, by simply taxing the rich. Unlike the Bowles-Simpson proposal, it admits that we need both robust growth and serious fiscal tightening to control deficits. It goes a long way toward acknowledging that the deficit reflects a fundamental, structural problem that needs a fundamental, structural solution.

Bowles and Simpson say even with decades of double-digit growth, we cannot grow our way out of looming deficits, and therefore need to focus on cutting spending. But as New York Times economist David Leonhardt points out, growth would sure help.

If the economy grew just half a percentage point faster than forecast for the next two decades (admittedly a tall order) that would cut the deficit by 50-60%. So the converse of Bowles-Simpson is also true: we can no longer realistically tackle deficits by just cutting spending (or raising more tax revenue); we must also grow the economy. To achieve this, the BPC report proposes a balanced package of spending cuts and revenue raisers, economic growth and deficit shrinking measures.

But, perhaps inevitably for a bipartisan commission, it pulls punches. It states the important principle of reconnecting job growth to deficit reduction, but its concrete policy goal is a little tepid: creating 2.5 million to 7 million jobs over the next two years. We need tens of millions of jobs. 9.6% of Americans, or 15 million people, are officially unemployed, according to the narrowly defined BLS measure; 17% or 26.5 million are unemployed according to the somewhat broader U-6 measure, and in my previous posts I cite evidence the unofficial but true number of Americans who want to and could work but don't have jobs is more like 75 million, perhaps higher. They are the greatest untapped resource for economic growth and therefore for deficit reduction.

If we want to employ them, a one-year payroll tax holiday for employers and employees is a start. It would lower hiring costs and stimulate labor demand, bringing more of those long-term unemployed and discouraged workers back into the labor force. But it will not set us up for decades of faster growth, and it's a half-measure even compared to economist Nouriel Roubini's proposal for a two-year payroll tax holiday.

So while the subject of deficits and payroll tax is on the table, why not consider the latter's full jobs stimulus and deficit cutting potential: tax shifting? I discuss what cutting payroll tax and replacing the lost revenue with taxes on non-labor items could do for job creation, the deficit and the environment in Part II of this post.