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Posted at 07:19 AM ET, 05/08/2012

A major step toward restoring our economy

So I'd like to keep my little thread with Ed going on deficit reduction vs. government stimulus. I don’t disagree that our nation's long-term debt is not sustainable. But that ignores my point (and many others smarter than me) that we have a short-term investment crisis that only the government can solve.  I know that statement makes Ed and many other conservatives break out in hives, but it's true.

Interest rates are at zero, but we have a jobless recovery, or at least an economy that isn't growing fast enough to get unemployment any where near acceptable levels. The economy grew most sharply under the accelerator of President Obama's recovery package but has not slipped back as that spending has ebbed.  While everyone favors private investment instead of government largesse, that hasn't been forthcoming.

 

The way to ensure recovery and to stimulate private investment is to embrace a grand bargain much larger than any discussed so far.  In this version, the country would deal with its dual threats: debt and slow growth.  (Remember the two problems feed each other in a very scary way.)  The president would propose and Congress would pass a long-term package of spending cuts and tax increases that would tie debt to a percentage of gross domestic product. When the economy is in crisis — based on some set of metrics including unemployment — that percentage could be higher, but as recovery gains steam, the percentage would  have to drop.  In return for this assurance on debt,  the government would undertake a new stimulus plan to boost employment.  

This creates the opposite cycle from what we have now.  More temporary debt is allowed, but only with a rock-solid commitment— as rock-solid as they get in Washington— to significant long-term reductions.  The government investment spurs job growth, which spurs tax revenues, which allows and then requires debt to be lowered.

I wish President Obama would run on some version of this plan.  His State of the Union speech this year indicates that he believes we need this kind of approach.  If he did run on this, he would be much better positioned to make it happen — if he wins.  (And yes, I think this bold approach could help him win.)  And if such a grand bargain did happen, it would be a major step to restoring our economy and avoiding a very ugly alternative.

By  |  07:19 AM ET, 05/08/2012

 
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