There's a lot wrong with the deal reached by the Administration and Senate Republicans. The most insidious problem with it is the 12-month cutback in payroll taxes that fund Social Security and Medicare from about 6.7% to about 4.7%.
That suspension doesn't harm the program finances during the first year - the shortfall is made up by the General Fund (or rather, by further deficit borrowing, mostly from the Chinese). The problem comes in December 2011.
We will still be in (at best) a very weak recovery with very high unemployment. It doesn't take a seer or cynic to see what will happen twelve months from now. Republicans in Congress will say, "Obama is going to raise taxes on working class Americans!" and will refuse to extend the General Fund transfer. Instead, the GOP will demand cuts in benefits and hikes in the retirement age. And, unwilling to see a tax increase in the middle of an economic slump, the Administration and Congress will go along.
There's a simple fix for this.
Take the $120 billion that the payroll tax rollback will cost. Instead of spending it on slightly higher takehome pay for workers (about $15 each, on average) spend it on one big check each: an average of about $800. Mail that check to each worker.
To an accountant these two plans are identical. Over the year the same amount leaves the government 's books, and the same amount goes to each worker. So, why does it matter?
Simple: the $800 (more for a two-income family) will be treated by the average worker as a windfall. Maybe it will help fix the car or pay for a vacation, or for medical bills. Maybe some will even save it - more power to them! The $15 per paycheck is different. It gets baked into the weekly budget. Losing that in 2012 will hurt like a toothache.
Politically, we can end the windfall program after a year (we've done it before, under Bush.) We can't end the addictive paycheck rollback.
The windfall option costs exactly the same and delivers its benefits to exactly the same people. Would the Republicans block the whole deal over this simple change? It's hard to believe it: giving up the high-income tax benefits for a change with no financial impact?
And if they DID block it, that would tell us just how destructive they think their Trojan Horse gift is.