Payroll taxes (V1)

Krugman comments on the politics around the payroll tax, and reminds us that "Milton Friedman’s permanent income hypothesis tells us that much of such cuts will be saved, not spent." This makes the case for spending based stimulus much stronger. The long term unemployed are having significant trouble finding work. After some threshold they can reasonably assume their future employment income to be zero. However, once they are back in the work force, they have reentered the ranks of the employed and can reasonably expect continuous work until their retirement. The result is that their lifetime income has increased dramatically and they can be expected to spend a large portion of their wages. There is a little model below the fold.