Tax or deficit choice - the lesser evil?

“strongly suggest that the latest fiscal policy actions will serve to further restrain economic growth. We cannot tax ourselves into prosperity ... We can, however, deficit spend ourselves into poverty.”

In their fourth-quarter 2012 Quarterly Review and Outlook – today’s OTB – Lacy Hunt and Van Hoisington spell out the consequences of the so-called American Taxpayer Relief Act 

-from John Mauldin 

A very good way to put the current policy choice issue within the context of macroeconomics. It is hard to say why so many are optimistic.

Lacy and Van also present another interesting piece of analysis. We still have close to 2% inflation but there is still slack in the economy. 

To be sure, prices of many items are rising, partially due to legislative changes in taxes, fees, regulation, compliance costs, medical mandates and other non-market forces. However, competition in the marketplace has created downward pressure on market driven prices. Thus, we have an unusual paradox whereby legislative and regulatory changes elevate the cost of living, yet with this inflation, there is no associated growth in income and standards of living decline. In this circumstance, real income falters, and purchases of non-mandated and discretionary items decline in value and price. Call it “the deflationary paradox of legislated increases in the cost of living.”