Robert Murphy has written an article discussing the payroll tax cut and its possible effect on unemployment.  Murphy is a clear writer and clear thinker.  This article today may be a little bit harder to follow than some of his other material, but you can still get a good idea of what he is talking about even if you don’t understand his graphs.

The gist of the article is saying that the payroll tax cuts probably won’t help the unemployment situation and may even hurt it.  Obama and the Republicans compromised on a tax and spending package.  It will retain the current income taxes and, like most things coming out of DC, will increase or retain spending on programs such as unemployment.  The other piece of the legislation is that it will cut the Social Security payroll tax from 6.2% to 4.2% for one year, but just on the employee portion.

In this article, Murphy discusses and confirms comments by Bryan Caplan.  Basically, he says that by reducing the employee portion of the payroll tax and not the employer portion, it could actually cause an increase in unemployment.

This makes some sense.  There are several ways to reduce unemployment (reducing government), but basically wages need to fall or productivity needs to increase.  If we have high inflation in the future, this could help with unemployment in one sense because it could reduce real wages even if people don’t see a number reduction on their paycheck.  In giving a payroll tax cut to the employee, it actually increases their take home pay.  This has actually increased wages, in a sense.  But we need wages to fall if the market is going to clear the unemployment problem.

Aside from this argument, the problem once again is spending.  The Republicans and Democrats compromised.  The Republicans got tax cuts and the Democrats got more spending.  We need lower taxes with lower spending.  This whole thing just adds to the deficit and the debt and brings us closer to the day of reckoning.  We should take advantage of any money that we can get now and convert it into real assets, whether it is gold, silver, housing, food, or toilet paper.  You don’t want to be in dollars when the massive inflation comes.