The fiscal cliff deal is a failure under three different economic theories
From the Keynesian perspective held by many Democrats, it won’t stop a 2 percent jump in payroll taxes, which will sap almost as much consumer demand as extending middle-class tax cuts will preserve. Brad DeLong, a University of California at Berkeley economist who advised President Bill Clinton, calculated on Tuesday that the agreement would drain nearly 2 percentage points from gross domestic product growth this year.
The deal answers one major uncertainty question — what will marginal tax rates be? — for investors and business executives. But it also sets up several new policy showdowns in the coming year, outcomes uncertain, starting with an immediate fight over raising the national debt limit. A similar fight in 2011 triggered a spike in a policy uncertainty index compiled by economists at Stanford University and the University of Chicago…
The deal also works against the “cut-and-grow” theory advocated by many congressional Republicans, who say reducing spending and debt will unleash new investment. The deal raises taxes, prolongs higher deficits than most alternative scenarios and includes no changes to safety-net spending programs such as Medicare and Social Security.