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THE IDEA OF A PAYROLL TAX CUT, EXPLAINED
By Lisa Desjardins, @LisaDNews

Rising concerns about the economy are also raising an old recession-fighting idea at the White House: The payroll tax cut. 

“[The] payroll tax is something that we think about,” President Donald Trump told reporters today, confirming earlier reports that the idea was under discussion, “And a lot of people would like to see that, and that very much affects the workers of our country.”

The concept may be one of the most potent tools the government has to stimulate the economy. Other traditional measures, like interest rate cuts, are already near or close to being maxed out.

How would the payroll tax work? 

• The government would temporarily cut the 6.2 percent tax that is automatically taken from Americans’ paychecks in order to pay for Social Security.
• Congress and the president would have to agree to the cut. 

• A payroll tax cut is a fast, direct shot to the economy. Under President Barack Obama, the rate was cut to 4.2 percent for two years in an effort to keep the economy growing.
• The Congressional Budget Office estimated in 2010 that every dollar cut in the payroll tax leads to $0.30 to $0.90 in new spending. That is a wide range, but allows for a potentially significant impact almost immediately.  In contrast, other stimulus, like infrastructure spending, can take months or years to boost the economy overall.
• It would be temporary.  

• The price. The Committee for Responsible Fiscal Budget estimates that a payroll tax cut the size of the Obama-era cut would cost roughly $300 billion. (Before interest.)
• How government would handle the price. As mentioned above, the payroll tax funds Social Security. If it were cut, Congress and the president would need to decide if those lost funds would come from Social Security’s Trust Fund or if the Treasury would repay them. Either way, it is likely red ink. This could lead to difficult political debate in a time of historic deficits. 

• The economy is in a positive, almost enviable state in many ways. Unemployment is low and Gross Domestic Product is growing consistently, if not robustly.But some economists fear that recent stimulus measures -- including low interest rates and tax cuts -- will not be enough to override the drag from the continued trade battle with China. And, as you’ll read below, they are looking at possible flags for a recession.

1. The Yield Curve: What has historically been a strong forecaster of recessions, the yield curve reflects the interest rates of U.S. Treasury bonds. When investments in short-term, three-month Treasury bonds exceed those of long-term, 10-year bonds, the yield curve is inverted. This has already happened. An inverted yield curve is a bad sign for the economy because it indicates that investors are nervous about the long-term prospects of the U.S. economy. As The Washington Post’s Karen Tumulty explained on the NewsHour last week, an inverted yield curve has preceded six of the last six recessions. (Read more about the yield curve from our own Gretchen Frazee).
    
2. Consumer spending: Whether Americans are opening their wallets is pretty telling of where the economy is headed. Are American consumers -- whose spending makes up about two-thirds of the U.S. economy -- able and willing to buy? According to the Bureau of Economic Analysis, consumer spending has steadily decreased since March of 2019. 
    
3. Industrial Production: The Institute for Supply Management (ISM) index, which analyzes companies’ movement (inventory, hiring, etc.), indicates whether the manufacturing sector is growing or contracting. If the index reads above 50, the sector is growing (last month, the index read 51). If the index reads below 50, the manufacturing sector is contracting. While the manufacturing sector does not have the same pull on the U.S. economy as it once had, (i.e. the mini industrial recession that occurred in 2015 to 2016), an ISM reading below 50 can still signal an economy in dangerous waters.
    
4. Housing Market: Softness in housing market -- (likely) the biggest purchase the American consumer will make in their lifetime -- can indicate an economic recession. The market for single-family homes has weakened across the country, similar to what occurred before the recessions in the 1990s and early 2000s. 
    
5. Auto Sales: Car sales have slowed down in 2019 after many years of growth, indicating consumers are timid to make a large investment. As vehicle prices rise to record levels, consumers are struggling to keep up. While recent forecasts show a slight increase in auto sales for July 2019 from the previous month, sales have decreased year over year.
    
6. Aggregate Hours Worked: The number of total hours that full and part-time employees work over a week also gives economists a look into the fate of the economy. Measured by the Bureau of Labor Statistics, if workers punch in fewer hours, that suggests companies have less need for their labor and also means workers have less money to spend. 
    
7. Unemployment: The unemployment rate currently holds at a low 3.7 percent in the United States -- Trump’s greatest selling point for his reelection bid in 2020. A spike in unemployment and an economic recession can come hand-in-hand.