ECONOMY
The Economics of the Fiscal Cliff

Anthony P. Mueller

As 2013 approaches, reversing earlier decisions by the US government and Congress that would lead to public spending cuts and higher tax rates beginning next year becomes more urgent. The US is moving towards a fiscal cliff that would bring down the economy because of the massive ‘extraction’ of funds. What is behind these claims? What are the determinants of public debt and the essentials of debt management, and where is the economy headed?

Mueller discusses these, and explores ways out of the debt trap.

“Theory and evidence show that in order to overcome a debt crisis, policy must combine the debt reduction program with incentives for private enterprise to fill up quickly and in an efficient way the space that is left by government,” writes Mueller. “With the right incentives in place, private business will generate employment and income not despite but because government does cut spending. The task ahead not only for the US but for all countries which are in a debt trap is to bring down debt in combination with a forceful surge towards free enterprise.

source: financialsense