By Philip Zelikow
As a preface, calculators should note that the stimulus package is not the only major fiscal policy measure the Obama administration will propose. For example, the new administration will likely give a high priority to a comprehensive national health care plan as well. I have no opinion on the merits of this policy, but -- if enacted -- such a program does seem likely to require some large federal outlays as it is phased in, probably building at least another $100 billion into annual outlays for the foreseeable future.
The sensible economists in the Obama administration team get all this. They know very well that all the best economists stress that the big fiscal injection must be temporary -- and, perhaps even more important, be seen as temporary. Thus they will argue hard to improve "fiscal governance" to reassure everyone that this will be so. Otherwise the results might be very bad indeed. So these good economic advisers are probably envisioning a policy design choreography that would unfold something like this:
Step One: Massive increase in federal spending and tax cuts for stimulus/investment/heath care, etc. during 2009-2010 (yielding political benefits for them in the 2010 midterm election).
Step Two: Automatic or semi-automatic turnoff of the federal stimulus faucet in 2011. The world must see that the faucet was on a timer and will shut off.
Step Three: Allow the Bush tax cuts to expire in 2010, so that federal taxes will increase as the economy heats up. This shows the world the U.S. program has fiscal sustainability and will have countercyclical cooling.
And then...
Step Four: Reduce risks about U.S. solvency by developing medium-term and long-term fiscal plans and reforms to show that the U.S. is acting to avert entitlement bankruptcy.
Hmmm. If it works, the U.S. government will pull a lot of Gs in executing those hairpin turns.
So the question is: Do observers assess that the Obama administration and the Congress will probably be able to pull off these fiscal acrobatics? Then, after you have done that political assessment, weigh the balance of risks, remembering that U.S. solvency is the foundation of U.S. and perhaps global security.
Aside from all the usual arguments folks can then have about how the political process might work, I'll add just this one: Remember that it is harder to turn off stimulus spending if the capital investments are to be followed by large, continuing costs to operate the new things one has built. (Or, as the US painfully discovered so often in Iraq, bad things happen when the relevant local authority can't or won't operate what you've built for them.
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