The announcement that an agreement has been reached between President Obama and congressional Republicans is a good sign for the national economy as well as the Michigan economy. The agreement is to extend the Bush tax cuts through 2012, extend for 13 months (until the beginning of 2012) the federal extended unemployment benefits, allow some short-term business tax cuts, and reduce for one year the employee portion of the Social Security Tax from 6.2 percent to 4.2 percent. The agreement will reduce unemployment, but probably not for the reason that people may expect.

The first reason the package is going to increase employment is because it reduces uncertainty for producers about what their tax liability will be for next year. While the package would have been better had the tax rates in effect in 2010 been made permanent, so producers could make long-term plans, at least we have eliminated the chance that taxes will rise in the next two years.

As I noted in my August 13 column in The Michigan View, unemployment and the number of employees working part-time who wish to work full-time are very high primarily due to uncertainties about what it will cost to hire an employee. Many of these uncertainties remain, particularly with regard to health care costs, but this agreement at least establishes some certainty about the tax costs of producing.

The extension of federal unemployment benefits, while gratifying to those whose unemployment benefits would end otherwise, nonetheless will act in the opposite direction — it will lead to larger unemployment than would otherwise be the case. By reducing the cost of being unemployed, the extension will increase the number of people unemployed, primarily by allowing them to remain unemployed for longer periods of time.

This will increase the cost of unemployment benefits and increase the tax that is paid by employers in Michigan when they hire people. This, by increasing the cost of hiring people, will further increase unemployment. Now it may be that we wish to make this tradeoff — to provide a social safety net for the unemployed and in return have higher unemployment, but to act like there is no tradeoff would be ignoring reality.

The portion of the deal that lowers the Social Security payroll tax will increase the return to labor for working. This should result in increased employment, since the net wage will go up. The argument that the economy will be boosted because people will spend the money is the standard Keynesian argument.

This is a flawed argument — the effect on the economy will come from increased incentives to invest and produce rather than an increase in demand. There isn't space to discuss this in a single column, but I recommend reading Friedrich Hayek's 1966 article, "Personal Recollections of Keynes and the Keynesian Revolution," for those who wish to pursue the matter.

The Republicans were correct to recognize that the most important part of the tax package was the agreement not to increase taxes on those returns with an adjusted gross income in excess of $250,000. While I brought out the importance of "tax cuts for the rich" in a column last October, it is worth reiterating that a main reason to reduce taxes for the upper-income brackets isn't to affect the behavior of those who are already rich, but rather to increase the reward for those who are not yet rich but will undertake risky ventures to innovate and produce new goods and services for us in the future.

In addition to my earlier arguments, a couple of points may also be made: First, the increase in taxes on "the rich" that would have occurred without the agreement would have had a substantial effect on small business. While it is true that only a small portion of all small businesses will be affected by an increase in taxes on the upper-income bracket, a study by the Joint Committee on Taxation found that 44 percent of small-business income would face a tax increase.

It is these successful small businesses that normally provide job growth, and it is the lack of job growth from this sector that has contributed substantially to the jobless recovery.

An argument that tends to dominate the "tax cuts for the rich" debate is that they don't pay their fair share. This is interesting. What might that fair share be? The top 1 percent of those who file tax returns pays about 4 out of every 10 dollars of the federal personal income tax — 38.02 percent in 2008, which is the latest data available. The bottom 50 percent pays 2.7 percent of the personal income tax. So by any reasonable person's measure, the rich are already paying a large share of the personal income tax. Increasing the tax rates of the highest earners will actually result in collecting less tax from them and reducing the share of taxes that they pay. But that is the subject of another column.