"The talks on a deal to resolve the federal debt limit problem recently ground to a halt, with neither side budging from its position. The negotiations must now be completed by those in the highest pay grades, including President Obama. But he has pledged not to increase taxes on 95 percent of Americans. That makes the withdrawal by Republican lawmakers from Vice President Biden's group a master stroke: Will the president now follow rank-and-file Democrats by insisting on tax increases? Or will he lead them to a different destination by caving to Republican demands?
The president will need to cut spending or raise taxes to bring the deficit under control. Neither option is painless. But doing nothing risks an even deeper economic depression.
It is not possible to cut government spending significantly - as the Republicans are insisting - without hurting the economy in the short term. As Keynesian economists claim, a reduction in deficit-financed government spending will mean fewer government purchases of goods and services and smaller transfers to those with the largest consumption propensities. And those reductions will diminish aggregate demand, leading immediately to slower employment and output growth.
The alternative, as many liberal analysts point out, is to increase government revenues - by eliminating targeted corporate tax exclusions and requiring high earners to pay more taxes. But tax increases will burden consumers and businesses, reducing their spending and causing a similar reduction in aggregate demand"...........READ MORE
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