Far from being a major economic problem, we probably owe our "recovery," such as it is, to the large, roughly $1 trillion, federal deficit that is "injecting" demand not offset by corresponding "leakage" (taxes or fees), equal to about 1/15 of our $15 trillion GDP. Without this, we would very likely have continued contraction. Rather than cutting it, we should probably be expanding our deficit (as long as the world continues to accept dollars) to re-employ the roughly 20 million Americans who are unemployed or working part-time but looking for full-time work — this is the real deficit that we should be concerned about!
Moreover, in the absence of far-reaching structural change or another massive run-up of private deficits, our economy will continue to depend on a large federal deficit both in the short run and in the long run. Only by reducing our structural trade deficit (that is our full-employment trade deficit) and/or radically restructuring our taxing and spending through large increases in taxes on the wealthy (who spend a much smaller share of their income on current goods and services) and a major redirection of federal spending toward high employment generating sectors (like education and human services), can the fiscal deficit be reduced without harming the economy and increasing the real unemployment deficit — in the absence of a large increase in private sector deficit. This is more than a matter of short-term Keynesian stimulus; it's a result of the long-term national income accounting identity (see: www.cpegonline.org/multimedia/DeficitLinkages.ppt).
Yes, we will have to cut the federal deficit at some point when the world's appetite for dollars (or the interest rate on treasury bills, now at record lows, begins to increase) but right now we should focus on getting folks employed and long-term economic restructuring (see: www.cpegonline.org/documents/MayDayManifesto.pdf), not cutting the deficit!
Conclusion: Any effort to avoid the "fiscal cliff" which reduces long-term restructuring will harm the economy. It would be best to repeal the Bush tax cuts and increase the deficit by spending on economic restructuring (including a large federal jobs program, see: www.cpegonline.org/reports/jobs.pdf) until the economy is sufficiently "rebalanced" so that it is no longer dependent on a large federal or private deficit to keep folks employed (and still leave 20 million people out in the cold!).
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