Martin Wolf, who wrote the book on our current economic troubles, has a thought-provoking and extremely worrying column in the Financial Times. Everyone should read it. Here's the basic argument:
We are in the grip of the most significant global financial crisis for seven decades. As a result, the world has run out of creditworthy, large-scale, willing private borrowers. The alternative of relying on vast US fiscal deficits and expansion of central bank credit is a temporary - albeit necessary - expedient. But it will not deliver a durable return to growth. Fundamental changes are needed.
Which might be a problem. Because:
What makes rescue so difficult is the force that drove the crisis: the interplay between persistent external and internal imbalances in the US and the rest of the world. The US and a number of other chronic deficit countries have, at present, structurally deficient capacity to produce tradable goods and services. The rest of the world or, more precisely, a limited number of big surplus countries - particularly China - have the opposite. So demand consistently leaks from the deficit countries to surplus ones. In times of buoyant demand, this is no problem. In times of collapsing private spending, as now, it is a huge one. It means that US rescue efforts need to be big enough not only to raise demand for US output but also to raise demand for the surplus output of much of the rest of the world. This was a burden that crisis-hit Japan did not have to bear. ... Given the persistent structural current account deficit, how large does the fiscal deficit need to be to balance the economy at something close to full employment? Assuming, for the moment, that the private sector runs a financial surplus of 6 per cent of GDP and the structural current account deficit is 4 per cent of GDP, the fiscal deficit must be 10 per cent of GDP, indefinitely.
Obama is making the right move by telling the country now that the deficit is going to get a whole lot larger, and that it will have to be like that for a while if we're to avoid serious economic consequences. Thing is, he's already encountering mild resistance to his $775 billion proposal. And that proposal might not be big enough.