Stimulus musings continued

1. As Krugman points out, the new CBO economic forecast shows why the stimulus being discussed is still too timid, despite its eye-popping size. It's a 3% of GDP stimulus to address what CBO believes is an 8% gap we face between actual and potential GDP. This is the ball people need to keep their eye on.

2. Republicans like John Boehner continued their deeply confused and almost certainly disingenuous critique, saying that the new dismal budget projections -- a $1.2 trillion deficit next year before the stimulus is added -- proves "we can't borrow and spend our way to prosperity." Wrong, wrong, wrong. We have no choice in the next two years but to borrow and spend our way to recovery. Yes, of course, we have to get back to fiscal sanity afterwards, but that is then and this is now. As I argued recently in Fortune and Politico, the answer is to committ to deficits of no greater than 2-3% of GDP (vs. what could be an epic 10% next year) once unemployment goes back under 5-6%. Make this the stated goal. Require a supermajority vote of Congress to run deficits any bigger. Then empanel a bipartisan commission or some such now to show the way as part of the stimulus bill, to signal to markets that we know the madness must be temporary.

3. Martin Feldstein deserves profound credit for stepping up to support a big stimulus (even though he's not quite to the size we need yet either). If a Republican economist of his stature had not been supporting extraordinary measures from the beginning, the debate today might be totally different.

4. More on this down the road, but one way to get back to fiscal sanity on the spending side after the economy recovers won't only be long-term entitlement reform. From my OMB days under Clinton I was always impressed by the incredible potential power of a one year freeze on large classes of spending. When the moment is right a few years from now, I think Obama could sell such a move politically as part of a shared sacrifice to get our fiscal house in order. The interest groups scream, but the impact is huge -- it lets revenues "catch up" for a year, and in a strongly growing economy this shaves huge amounts off the deficit. I'll come back to this at some point more concretely as the debate unfolds, but wanted to put the marker down as food for thought early.

5. Of course taxes will also have to rise as a share of GDP -- which means we'll need to explode one of the Dead Ideas featured in my book, that "Taxes Hurt The Economy (And They're Always Too High)." Obama should charge any long term "fiscal fixes" commission to hit the road explaining the tax facts to the public over the next few years as well.


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