If the tax cut is worth $40 per payroll employee, and 160M Americans benefit from its extension, then the whole thing is worth $6.4B in forgone federal revenue. Americans, being what they are, may buy another $40 worth of pizza and beer for a month. Poor working stiffs on payroll do have a higher marginal propensity to consume. They will not put that $40 toward their IRA contribution in 2012. They will not pool it with their neighbors to start a small business or resilient community. They will choose the fun today with no regard for the hangover tomorrow.
The tax cut is politically popular and financially suicidal. The inability of the federal government to come to grips with the mismatch between its revenue and spending cannot be solved with these kinds of cynical games. Credit rating agencies are once again threatening to downgrade the U.S. government's sovereign debt rating. Sooner or later, some instance like this tax cut standoff will be the straw that breaks the camel's back.
Our leaders reflect our desires. They are mirrors of what our public character as Americans has become and that's why we return them to office. Our elected officials are incapable of making hard choices necessary for austerity because we can be counted on to vocally endorse profligacy. This is our fault. The bond market is the only adult in the room. It will force us to pay the piper.