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Forget deficit reduction: Here comes more stimulus

July 13, 2011: 5:00 AM ET

Republicans and Democrats say they're going to cut the nation's debt by $4 trillion.  Don't believe a word of it.

By John Cassidy, contributor

FORTUNE -- With all the talk of debt ceilings and federal spending cuts, you might think that the era of stimulus programs was behind us. Think again. I strongly suspect that by the end of the summer both parties will be putting together yet another tax and spending bill designed to get the economy going. Call it Stimulus 4.0.

Such a package will fly in the face of efforts to cut the deficit, but that won't prevent it from being enacted. With the economic picture darkening daily, the burden of preventing another slump is falling on the White House and Congress. The Fed, which has just finished its second dose of quantitative easing, seems determined to sit on its hands. Before long, incumbents in both parties will start to panic about next year's election. Debates about the size of the federal government will take a back seat to getting reelected, and the result will be more tax cuts and spending increases.

The White House is already floating the idea of rolling over this year's payroll tax cut, which was supposed to be temporary, and extending it to employers. The proposal, which would cost up to $200 billion, appeals to the Republicans' corporate base, and it could even be included in a last-minute deal to raise the debt ceiling. If that doesn't happen, the idea will be resurrected in September, when Congress returns to session and when it will be accompanied by other costly suggestions to help the jobless, such as extending unemployment benefits (again), boosting tax credits for capital investments (again), and providing firms with subsidies for hiring people.

Fiscal hawks will complain, and opponents of stimulus programs will say the economy's weakness demonstrates the futility of Keynesian policies. I say: Let 'em whine. If the government hadn't stepped in to offset a collapse in private sector spending, the Great Recession would have lasted much longer than it did, and the unemployment rate would be even higher. With banks, householders, consumers, and local governments still rebuilding their finances, the economy could easily fall back into a recession.

You don't believe me? Look at Britain, where the economy has slowed almost to a stop because of an austerity program designed to balance the budget by 2015. If Congress was really serious about slashing spending and raising revenue, we would be on the same path as the Brits.

In this country, thankfully, the commitment to "sound finance" is about as durable as the residue of a rain shower on a hot day. Whenever the economy stutters, it evaporates. In February 2008 the Bush administration pushed through Stimulus 1.0, a $150 billion package of tax cuts and additional spending. A year later came the American Recovery and Reinvestment Act of 2009, at $787 billion. Last December, President Obama and congressional Republicans agreed to extend the budget-busting income tax cuts Bush introduced in 2001 and to reduce by 2 percentage points the employee's portion of the payroll tax. That wasn't officially labeled a third stimulus package, but it injected another $150 billion into the economy and boosted the deficit.

Supposedly, things have changed: Both parties say they would cut the deficit by $4 trillion in the coming years. I don't believe a word of it. In the White House's budget proposal, much of the deficit reduction is slated for 2020 to 2024, which is a bit like an alcoholic promising to give up drinking eight years hence. Congressman Paul Ryan's plan is another Republican exercise in voodoo economics: big tax cuts that are supposed to pay for themselves combined with hefty but unspecified cuts in spending programs.

For good or ill, the American political system has a chronic deficit bias. Absent a sudden collapse in the bond market, it isn't going away. Over the long term, our inability to match spending to revenue presents serious challenges to the country's solvency. For now, though, more "irresponsible" stimulus spending happens to be precisely what the economy needs.

--John Cassidy is a Fortune contributor and a New Yorker staff writer.

This article is from the July 25, 2011 issue of Fortune.

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