We are not in another Great Depression, and we don’t need a recovery program on the scale of World War II. But we will need increased deficits, at least for a year or two until we are on the road to recovery. Even if we did nothing, the recession itself would reduce economic activity, hence tax receipts, and only an economic idiot (or perhaps the International Monetary Fund) counsels fiscal austerity in a deep recession.

A temporary increase in deficit spending might offend Democratic budgetary conservatives who have embraced pay-as-you-go budget rules both on grounds of fiscal prudence and as a defensive strategy against further Republican tax cutting. Under these so-called pay-go rules, all new outlays and all new tax cuts need to be “paid for,” either by other program cuts or other tax increases. For example, in the first stimulus package, a rather meager $168 billion affair passed by Congress last February, conservative Blue Dog Democrats joined far-right Republicans in blocking a more expansive measure because they didn’t support increasing the deficit. But as Obama explained so cogently, the very definition of a fiscal stimulus is a temporary increase in deficit spending.

At the same time, not all stimulus programs are fiscal. For the longer term, there is a good argument that raising taxes on the very wealthy and spending the money on old-fashioned public works or investments in energy independence, science and technology, or college aid would have a net stimulative effect, even if the deficit impact were neutral. The reason is that every penny would be spent, whereas the nontaxed incomes of the very wealthy might be saved, moved abroad, or invested in nonpro¬ductive uses such as diamonds, gold, or pre-Columbian art.

Legislatively, I am assuming that while an emergency public works program was advancing on one track, a program to repeal the Bush tax cuts would be moving on another. There might or might not be an exact rendezvous. But pay-as-you-go budgeting was a tactic for another era, one in which Republican tax giveaways needed to be restrained, and one in which the economy was not in deepening recession. Fiscally, as FDR belatedly recognized, budget rules that make sense for normal times do not apply in an economic emergency. Over the entire business cycle, fairly moderate deficits of, say, 2 percent of GDP are sensible. But in a severe recession, greater deficit spending makes sense; and in no event should a public works program be held hostage to a balanced budget, much less to long-term reform of social insurance.

Beyond an immediate and more expansive program to increase jobs and fiscal relief for communities, the new administration will need to move on multiple fronts. Here again, the most important principle is first to do what needs to be done to stop the bleeding while building toward more expansive successes in the future.
The Special Case of Housing

By July 2008, there were 272,171 foreclosures recorded, a 55-percent increase from a year earlier. Homeowners were losing trillions of dollars of home equity, the principal form of their net worth. During the boom years, as incomes lagged behind inflation but housing values surpassed it, homeowners got into the habit of borrowing against their homes. By spring 2008, more than half of the value of America’s homes was not equity but debt, up from just 20 percent debt in the 1960s; it was the worst debt-to-equity ratio since World War II. Plummeting housing values contributed to the downward spiral of reduced consumer spending and shrunken economic activity generally.

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