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Playing Chicken with Our Economic Recovery

5 Reasons Why Extending Unemployment Benefits and the Payroll Tax Cut Will Benefit All Americans

SOURCE: AP

A family shops for groceries in Edmond, Oklahoma. Unemployed Americans are far more likely to spend their benefits on groceries, bills, and other goods and services than they are to sock it away for later.

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An old media axiom says it best: Three makes a trend. And for the third time this year, the federal government is facing the very real possibility of a shutdown because of budgetary brinksmanship on the part of conservatives in Congress.

This time the standoff is centered on a payroll tax cut benefiting 160 million working Americans—and unemployment benefits that help keep some 6.7 million unemployed Americans afloat as the economy recovers from the recession.

Senate Democrats want to extend and expand the payroll tax holiday, increasing the employee cut from 2 percent to 3.1 percent and giving a break to employers, too. But House Republicans are demanding unjustifiable and unrelated provisions in exchange for a payroll tax cut, like allowing states to require drug tests for recipients of unemployment benefits.

That puts a middle-class tax cut that should be a no-brainer at risk, and threatens to hurt the workers most affected by a recession they did not create. Instead of playing chicken with our economy to score ideological points, lawmakers should pass a clean payroll tax cut and unemployment benefit continuation. Here’s why, in a nutshell:

The payroll tax cut benefits workers—and could benefit businesses, too

The current 2 percent payroll tax cut puts an extra $1,000 per year in the pockets of each and every working American—122 million U.S. households in total. A proposal from Senate Democratic leadership would increase the break to 3.1 percent, giving average Americans an extra $1,500 annually, and extend the break to businesses as well. Under the Senate bill, 98 percent of businesses would receive a 3.1 percent tax break next year.

The 2 percent payroll tax cut generates a lot of bang for the buck

Consumer spending makes up about 70 percent of the economy—but growth in consumption has been slower than in any economic recovery since World War II. The payroll tax cut is one measure that has helped keep consumer spending growing at all. That’s because every dollar spent on the payroll tax cut stimulates about $1.25 in economic growth.

An average of $296 per week prevented 3.2 million Americans from falling into poverty in 2010

It’s important to remember that unemployment insurance is not a cure-all. The average weekly unemployment check will be only $296 in 2012. One year on unemployment benefits would total just over $15,000—not exactly a princely sum. And yet, in 2010, 3.2 million Americans were kept above the poverty line by unemployment benefits.

Unemployment benefits generate even more bang for the buck.

Parents admonish their kids to save money “for a rainy day.” For the unemployed, the rainy day has already arrived. That’s why unemployed Americans are far more likely to spend their benefits on groceries, bills, and other goods and services than they are to sock it away for later. And that’s why every dollar spent on unemployment benefits generates $1.52 in economic growth.

Not extending these measures would be disastrous.

The payroll tax cut and unemployment insurance have contributed more than their share to our economic recovery—a recovery that is still described as fragile. Failure to extend the 2 percent payroll tax cut and to extend emergency unemployment benefits will depress U.S. economic output by 1 percent overall. Moreover, it will greatly raise our chances of slipping back into a recession.

If Congress doesn’t extend the payroll tax cut and emergency unemployment benefits, 2.2 million Americans will be staring down the poverty line. Every working American will pay an average of $1,000 more in taxes. And our fragile economic recovery may begin to falter—all because conservatives in Congress insist on politicizing tax cuts and emergency aid for hard-working Americans.

Kristina Costa is a Special Assistant at the Center for American Progress.

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