A combination of cuts in the planned growth of federal government spending and large increases in federal taxes is scheduled to take place on Jan. 1. It doesn’t take a Ph.D in Economics to know this would cause problems for our limping labor market and our slowly growing macroeconomy.
There are three issues at hand. First, the underlying problems are our massive federal budget deficits and rapidly growing budget debt. Second, the potential solutions are also problematic. Actual reductions in government spending (however unlikely) and big increases in tax rates (and likely, an increase in tax revenues) would make it even more difficult for the economy to grow.
Third, all of this contributes to what economists call “regime uncertainty.” Nobody knows what Congress and President Obama will do — from the extent to which they’ll address the problem to the particular solutions they’ll embrace. And nobody knows if we’re near the cliff that limits the size of the debt.
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