With a deal now taking shape to extend temporarily the Bush tax cuts for 2 years, there has been almost universal outrage from the left against President Obama's "caving in" to Republicans. While this is a valid political point, is it a valid economic point?
After all, if Dems are to have any political future, they must strongly revive economic growth within the next two years in order to reduce unemployment and the federal deficit. In other words, economic growth determines the political destiny of the Dems. Fortunately, there is an excellent guide book available: The General Theory of Employment, Interest and Money.
Nearly 75 years ago, the U.S. economy along with the rest of the world was in the midst of the Great Depression and the advice of John Maynard Keynes was as apt then as it is now.
Today, Keynes would obviously recommend a "full employment budget" which would entail a much higher federal deficit than we currently have, probably at least double. But being a pragmatist, Keynes would also recognize that since further stimulus spending by Congress is not politically possible, the next best solution is income tax reductions to increase the deficit. Of course, the multiplier effect of income tax reductions is much less than a direct stimulus to consumer spending (70% of demand), but there is still a stimulative effect.
OTOH, with his usual foresight, Keynes would also see the need for future fiscal restraint once the economy gains momentum. Hence, a temporary tax reduction now that could be reversed in the future automatically if not re-enacted by Congress would be appropriate to avoid overheating the economy in 2012.
Keynes might also appreciate the Machiavellian aspect of the temporary tax reduction: in 2012, President Obama can once again campaign against tax cuts for the rich as he has done since 2007. Obama knows a winning issue when he sees one, so why not recycle it for his re-election campaign?