Raising taxes and cutting spending

I hate to sound like a doctrinaire Keynesian, which I am not, but the truth is that the economy does not suffer from a shortage of wealthy individuals and prosperous corporations able to invest in production and hire workers. It suffers from weak consumer demand due to high levels of unemployment and household debt. While reducing the government's deficits, if not its debt, is very desirable in itself, doing it entirely, or even nearly so, with spending cuts, exacerbates the inadequate demand problem. To some extent, I fear to a large extent, it will prove to be self defeating by adding to unemployment and reducing the government's tax revenues. The Fed will attempt to compensate by putting even more funds in the hands of well to do institutions and individuals, (who else did you think gets it when the Fed creates more money?), but as long as demand is weak that will be "pushing on a string" so far as the real economy goes. It will instead fuel speculation in assets of some kind or another risking "cost push" inflation -- the kind that can happen even with weak demand and a "production gap".

A good hedge against these problems would be to make new taxes on the wealthy a significant part of the deficit reduction effort. Although some of them may be too short-sighted to see it, the very wealthy will benefit enough from a healthier economy that the new taxes they are asked to pay in the near term will in the longer term turn out to be among their best investments.

Now and in the future, raising taxes and cutting spending need to be on a reasonably equal footing as policy options in addressing government debt.