By most accounts, Congress' 11th hour deal averted the "fiscal cliff," a combination of tax hikes and spending cuts that could have severely damaged the fragile economy.
While many in Washington are heralding the deal, most outside of the Beltway are not so enthused with the recent deal.
As the WSJ and Washington Post point out, the deal is being skewered by economists from nearly every economic school.
Appropriate income threshold to extend the Bush era tax cuts, tax rates on capital gains, lack of entitlement reform, and other elements will be hotly debated in policy circles and among economists in the coming weeks, months, and even years.
However, most damaging for the Obama administration and Democrats is the criticism that they are abandoning their own economic principles.
In the wake of the economic collapse, the Obama administration acted with an adherence to Keynesian economics.
The basic principle of Keynesian economics is that during times of recession, the government can promote growth through fiscal and monetary policies, including increased government spending and decreased tax rates to promote private sector spending.
This combination of increased government and private sector spending will increase demand, which in turn will increase employment and incomes.
Any deficits created will be made up later on through revenues generated from this increased economic activity and increased tax rates--a liberal Laffer Curve of sorts.
One important aspect of Keynesian economic theory is that tax rates should not increase until macroeconomic health is achieved so as not to deter consumption and demand.
In 2009, the Obama administration followed this approach when it invested nearly $1 trillion in stimulus spending coupled with extending the Bush era tax cuts.
Although growth has been slow, the administration has adhered to Keynesian principles, particularly by not increasing tax rates as the economy struggles to rebound to its pre-recession/depression levels.
This adherence has waned slightly, as exemplified during the campaign season when the White House deviated from Keynesian tax policy during times of recession.
Rather than eschewing any tax increase, the White House embraced increased taxes for higher earners while suppressing tax rates for the middle class.
The latter results from the White House's concern that increased taxes on the middle class could suppress consumption and aggregate demand, thereby reversing any economic growth experienced over the past few years.
The White House's distinction between acceptable and unacceptable tax increases during a fragile economy can be traced to a November CBO report that stated increased tax rates on earners making over $250,000 would not cause "much" harm to the economy.
Succinctly stated, the Obama administration's version of Keynesian economics appeared to be that tax hikes on the middle class during slow or negative economic growth periods should be avoided, but tax hikes on higher earners are acceptable so long as aggregate demand is sustained or increases.
Even accepting this as valid economic theory, the administration has severely deviated from its own version of Keynesian economics with its acceptance of the fiscal cliff deal.
Not only will tax rates on higher earners increase as a result of this deal, the middle class as a whole will also have a larger tax bill.
Together with the expiration of the Bush era tax cuts for higher earners, the payroll tax is set to expire, increasing from 4.
2% to 6.
2%.
Although the payroll tax increase is minor (only 2%), according to the Tax Policy Center, the increase will affect approximately 77 million Americans.
On the aggregate, the increased tax could have a severe, negative impact on the economy.
As University of California economist Brad DeLong notes in his blog: "The big reason to make a deal before January 1, 2013 was that detonating the "austerity bomb" would impose 3.
5% of fiscal contraction on the U.
S.
economy in 2013, and send the U.
S.
into renewed recession.
It was worth making a good-enough deal--sensible long-run revenue increases and tax cuts to close the long-run fiscal gap plus enough short-term fiscal stimulus to make the net fiscal impetus +1.
0% of GDP--in order to avoid renewed recession.
" But by my back-of-the-envelope count, the deal the Obama administration has agreed to still leaves a net fiscal impetus of -1.
75% of GDP to hit the U.
S.
economy in 2013.
That is only 40% of the way back from the "austerity bomb" to where we want to be.
J.
P.
Morgan Chase economist Michael Feroli is less cynical than DeLong, and estimates the deal will cost the U.
S.
economy 1% of growth, with other estimates ranging between 2-4% in lost economic growth.
So, why the hoopla over the increased payroll tax? That minor 2% tax increase is estimated to result in 0.
5% to 0.
6% of lost economic growth--or nearly half of estimated total lost economic growth.
By comparison, much of the fiscal cliff negotiations centered on what was the appropriate income threshold to extend the Bush era tax cuts.
Moody's chief economist Mark Zandi estimates the expiration of the Bush era tax cuts on earners making over $400,000 ($450,000 for couples) will cost the economy only 0.
15% of economic growth.
What's more, economists on both sides of the debate agree that the increased tax revenues are not likely to measurably reduce the deficit.
Regardless of whether one believes in the tenants of Keynesian economics, or eschews it for being a terribly failed economic policy, the Obama administration has, with its agreement to increase taxes on 77 million Americans in the midst of a still fragile economy, departed from its own economic beliefs, and in doing so done little to resolve concerns over the U.
S.
economy and economic policy.