December 22, 2011 in Nation/World

Consumers retrench as Congress drags

Economists say growth in 2012 will be damped if tax cut, jobless benefits expire
Martin Crutsinger Associated Press
 
Associated Press photo

Greg Kirksey, a pastor in Little Rock, Ark., said Wednesday that a payroll tax increase would be little more than an inconvenience for him, but others are “talking about whether to buy dried beans or ground beef to get their protein.”
(Full-size photo)

Also today

Stalemate: Chances fade for Congress to strike a deal. Page A3

WASHINGTON – Some say they’ll spend less on groceries. Others expect to cut back on travel. For many, there would be fewer meals out.

Across the country, Americans are bracing for another financial hardship: smaller paychecks starting in January, if Congress doesn’t break a deadlock and renew a Social Security tax cut.

The tax cut, which took effect this year, benefits 160 million Americans – $1,000 a year, or nearly $20 a week, for someone making $50,000, or as much as $4,272 or $82 a week for a household with two high-paid workers.

The tax cut is set to expire Jan. 1. If lawmakers don’t renew it for 2012, analysts say the economy would slow as individuals and families look for ways to spend less.

“Of course, it changes my plans,” said Craig Duffy, an information-technology worker from Philadelphia and new father of twins. Duffy said his family already has tightened spending, so “we’ll have to find a way to cut back.”

That might mean canceling a planned trip to visit the twins’ grandparents in Wisconsin, Duffy said.

The tax cut is part of legislation that would also renew benefits for the long-term unemployed. If the unemployment benefits aren’t renewed, starting in January nearly 6 million people would lose weekly checks averaging about $300 – the main source of income for most of them.

House Republicans have rejected a Senate-passed bill that would extend the payroll tax cut for two months and let the long-term unemployed continue to receive benefits during that time. That plan would give lawmakers time to work on a yearlong extension.

But most lawmakers have left Washington, and no negotiations are scheduled before the year ends.

If Congress doesn’t renew the two measures for 2012, analysts say the economy’s growth would slow by as much as 1 percentage point.

Less money in paychecks means less consumer spending, which powers the U.S. economy. Many people who say they already depend on each paycheck for living expenses say they can’t cut spending deeply. Instead, they’ll trim at the edges, wherever they can.

“It will limit my spending from week to week,” said Jennifer Stempel, an office manager from Denver.

Stempel said that could mean making fewer impulse buys at the grocery store, packing her lunch each day and rejoining a carpool she quit after gas prices declined this year.

“I was starting to relax about (travel expenses), but now I don’t know,” Stempel said.

The tax cut lowered the Social Security tax on incomes of up to $106,800 from 6.2 percent to 4.2 percent.

Without a deal, Americans would begin 2012 facing a tax increase just as an election year begins.

Smaller paychecks and reduced spending would coincide with a still-vulnerable period for the U.S. economy. Though growth has strengthened in the final months of 2011, some analysts say the gains might be hard to sustain. Workers’ pay isn’t rising much. And Europe may be on the verge of a recession that would undermine the American economy.

“A failure to extend the payroll tax holiday and the extended unemployment benefits would be a serious hit to the economy,” said Mark Zandi, chief economist at Moody’s Analytics. “The risk of a recession would rise and be uncomfortably high, particularly early next year, when the fallout from Europe’s troubles will be the greatest.”

Zandi predicts that the U.S. economy will grow 2.6 percent in 2012 – if Congress renews the tax cut and long-term unemployment benefits. Otherwise, he foresees 1.7 percent growth.

Other economists have made similar estimates. Many noted that the Social Security tax cut helped the economy avoid a recession in 2011, after high gasoline prices squeezed households, Japan’s earthquake reduced supplies to U.S. factories and budget cuts by state and local governments and a stalemate in Washington slowed growth.

The extension of unemployment benefits helped, too. Most states provide up to 26 weeks of benefits. The program that’s set to expire extended those benefits for up to 99 weeks in states with the highest unemployment rates. A proposal approved by the House last week would extend benefits for up to 79 weeks.

Analysts note that Americans of all income levels would be hurt by the loss of the payroll tax cut.

Some analysts say they think election-minded lawmakers will renew the tax cut and long-term unemployed benefits sometime in 2012. If they did, they could also make the tax cut retroactive to Jan. 1.

“After all the arguments, Congress will extend the two programs,” said Nariman Behravesh, chief economist at IHS Global Insight. “I can’t imagine that lawmakers will want to be blamed for the economy being even weaker than it is now. They would be committing political suicide.”

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