The Conservative Argument AGAINST Barack Obama’s Social Security Payroll Tax Holiday

This one piece of the compromise plan also explains why growth after next year is likely to be weaker, not higher, than the current optimistic predictions.

The problem is the nature of that growth. In the past century both parties and the economists behind them have focused on the business cycle, their theory being that for the country to grow, that cycle must be managed, preferably by them. But economic growth requires something else: trust that deals and contracts will be honored by all, including governments. Pensions are contracts, even public pensions like Social Security.” 

—Amity Shlaes, December 14, 2010.

ATLANTA—  The more I’m reading and understanding about the income tax compromise that Barack Obama has worked out with Congressional Republicans, the less I like about it.  The Heritage Foundation offers some insightful critiques of how the compromise is playing out.  In short, it is becoming a boondoggle of liberal spending initiatives, on top of offering only a short-term extension of the Bush tax cuts.  No wonder treasury yields are skyrocketing since the announcement of the plan.  However, one element of the plan that I initially liked was the one year payroll tax holiday being offered.  However, Amity Shlaes, a conservative economic historian, attacks even that element of the plan as being unhelpful. Her analysis is quite unique and unexpected.  You can read it here.

In short, she argues the payroll tax holiday breaks the social contract that Social Security represents with the American people. In essence, there is little difference between this contract breakage and the treatment by the U.S. government of the General Motors bondholders two years ago.  She contends that by breaking this contract, it will further destabilize a key element of economic growth- the faith market participants have that contracts and agreements will be honored.

Her critique is a thinker, from my standpoint.  I still like the idea of the payroll tax holiday, because I believe it places a small wedge between tax payers and their love of Social Security, which could open up their minds to further (and necessary) reform of the system.  Mrs. Shlaes is definitely a proponent of reform in Social Security, she alludes to that towards the end of the article.  But she is arguing that breaking the social contract in this way is not the best means of effecting that reform.

Interesting take.  What are your thoughts?