Proposed ‘fiscal cliff’ deal falls short under three economic theories

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Economists generally offer three theories for what’s hampering the still-sluggish U.S. economy: the Keynesian theory, which would like to see lower taxes or more government spending; the spending/debt theory, which would like to see both of those reined in; and the uncertainty theory. Under none of them can the White House-Senate deal to avert the “fiscal cliff” be considered an economic success.

The deal would not inject more consumer spending power into the economy this year compared with last year — in Keynesian terms, it does the opposite. It won’t reduce government spending, and it will boost the national debt by trillions of dollars compared with what would have happened if lawmakers had not reached a cliff deal. It resolves only a slice of the policy “uncertainty” that many business leaders say is chilling investment in America.

The best economic case for the agreement, from each of those standpoints, appears to be that things could have been worse.

The deal would prevent scheduled increases on marginal income tax rates for American familiesearning less than $450,000 a year, delay planned domestic and defense spending cuts (known as “sequestration”) for two months, maintain a variety of business tax breaks (such as one for wind-energy production) and extend unemployment benefits by a year for one-sixth of the 12 million people still looking for work.

full: http://www.washingtonpost.com/business/economy/proposed-fiscal-cliff-deal-falls-short-under-three-economic-theories/2013/01/01/ca1aa2da-5456-11e2-bf3e-76c0a789346f_story.html

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1. I think its safe to say

that the models based on previous economic structures are irrelevant now. Seriously, what manufacturing base do we have now? We've almost become a full service economy, and there's no standard bearer for that to measure against.