Obama tax deal: more jobs, higher growth, higher deficits

Tax cuts and increased government spending designed to support and grow the economy are fiscal stimulus measures. President Obama's compromise with the Republicans on taxes, which still has to be officially approved by Congress, will give America both.

The compromise appeases Republicans by extending all of the Bush tax cuts for two years. Democrats receive, in return, the extension of unemployment insurance benefits for 13 months.

In addition, various family and business tax credits and cuts will be extended.

Regardless of the political motivations and machinations that gave birth to this compromise, the short-term impact of it, like previous U.S. stimulus measures, is clear: higher economic growth, higher deficits*, and more jobs.

Actually, a large portion of the measures are already in place but were set to expire, so what Obama really did was prevent the impact that these expirations would have had.

According to the Pragmatic Capitalism blog, the new measures of Obama's plan will increase the deficit by about $270 billion over the next two years.

The existing measures represent, in dollar terms, a more significant part of the plan. For example, the costs of making the Bush tax cuts permanent alone increase the deficit by $3.7 trillion over ten years, according to the Congressional Budget Office.

In response to the plan, U.S. stocks rose about 0.5 percent (by later-afternoon trading) as investors bet on the positive impact it will have on the economy.

Meanwhile, the dollar index, down earlier in the day, edged back into positive territory while gold, up earlier in the day, is now lower. When investors worry about the U.S. budget deficit, they usually sell the dollar and buy gold. The actions of the market today, therefore, may suggest that investors are not too worried that this compromise will undermine confidence in U.S. sovereign debt and the dollar.

The White House said the plan will not worsen the medium- and long-term deficit of the U.S. because it contains only temporary measures to support our economy that will not add costs by the middle of the [2010's] decade.

Email Hao Li at hao.li@ibtimes.com

*The tax cuts -- and spending increases -- will almost certainly not be self-financing, meaning they will not increase GDP growth so much that the added tax revenues will offset the deficits.