You’ll recall that the two percent cut in payroll taxes was set to expire at the end of 2011 but was saved by a temporary, two-month extension.  The legislation also would continue long-term unemployment benefits and prevent a pay cut for doctors who treat Medicare patients.

The reason all of this wasn’t extended through the end of 2012 was the usual political selfishness that has marked just about every key issue for the past two years.  Republicans and Democrats each had their own pet legislation to attach to this popular proposal.  And each party also had its own preferred way to make up the revenue lost by reducing payroll taxes on 160 million wage-earners, who will have to pay an average of $1,000 more this year without the extension.

Well, the two-month extension will end on February 29 (thank goodness this is a leap year because the politicians will almost surely need the extra day).  And the boys and girls on Capitol Hill are no closer to resolving the issue than they were at the end of the year.

Republicans want to trade the payroll tax reduction for drug-testing and schooling of those receiving jobless benefits, delay of EPA regulations for industrial boilers and, most of all, approval of the Keystone XL oil pipeline.  Democrats say all of those ideas are non-starters and want to increase the amount and duration of jobless benefits, particularly in areas hardest hit by unemployment.

But the real roadblock is how to pay the estimated $160 billion the lower payroll tax and other provisions will cost the government in lost revenue for 2012.   Democrats have rejected a GOP plan to cut domestic spending programs. Republicans have refused to consider President Obama’s proposed surtax on people earning more than $1 million a year.

And there it stands.

What is missing–and what has been missing for some time now–is any willingness to compromise or to horse-trade so that each side gets something and no one gets everything.  That’s the way it has always used to work in Washington.  But in the current age of  ”I’m right and you’re not even worth listening to,” the chances for compromise are slim indeed.

Well, there’s some good news from a federal  court in California.  In Mazza v. American Honda Morto Co., Inc., the Ninth  Circuit Court of Appeals provided new protection against national class action lawsuits that are based on California’s liberal consumer protection laws.  The net result of this decision is to make it significantly harder to certify a class action under California law when members of the class are from other states, and it will discourage many of the class actions which are brought in California to take advantage of that state’s more receptive laws and courts.

Prior cases had said that non-resident class members could sue under California law if the alleged misconduct had occured in or “emanated from” California.  So any company with headquarters or advertising agencies located in California could be sued over supposedly deceptive marketing practices even if individuals or companies in the class made their purchases in other states.

But the Ninth Circuit ruled that nationwide class actions can only be brought under California law if, among other considerations, there were no conflict with consumer protection laws in other effected states and if no other state had an interest in applying its own law.  In this case, a three-judge panel ruled that 43 states had an interest in having their own law applied.

It may seem like a technical distinction, but it’s more than that.  Class action law firms routinely “shop” for the most receptive legal forums and laws and then seek class members from that state to make it all official.  It’s no surprise that California has been a favorite locale for such activity.  The appeals court’s ruling makes these practices more difficult to pursue.

And that’s good news for businesses besieged by class action litigation.

So it’s somewhat encouraging to see that the Index of Small Business Optimism, which is maintained by the National Federation of Independent Businesses (NFIB), gained 1.8 points in December–the fourth consecutive monthly gain.  All told, the Index has risen 5.7 points since August.

Looking at respondents who plan to add jobs compared to reduce jobs, the Index was up six percent net, down slightly from November but one of the strongest readings for 2011 and the second highest reading since September 2008.  Capital spending plans are up slightly, as well.

On the down side, overall expected business conditions ended the year 18 points below January 2011, with expected sales volumes down 4 points from the beginning of the year.  As a result, 10 percent fewer companies reported any growth in inventories.

What does it all mean?  It appears that small business owners, who are naturally among the most optimistic people we know, are upbeat about the long-term economic trends at this time.  But they remain cautious about the pace of the recovery.   And they don’t see any major gains in 2012 compared to 2011.