Federal budget deficits in this situation are like IV-bags in an emergency room: they stabilize things. IV's are definitely linked to sickness, and no one would use them if they weren't necessary. But very few doctors propose to cut back on saline while the patient is still sick. Today, however, the official economists and their followers in Congress, the White House and the media are divided between those who would remove the IV's slowly, whether the patient recovers or not, and those who'd like to charge through the wards, yanking needles from arms. The debt deal enacted earlier this month put the first group in charge, but that's pretty cold comfort.
The solution is not another "stimulus" — a term that stinks of needles and quick fixes. The solution has to be a long-term strategy: both a new direction for economic activity and new institutions to provide the money. The proposed national infrastructure bank — a permanent institution — is the right sort of thing and would be a good place to start.Both the IV analogy, and the need for a radical departure from conventional solutions are right on the money. I would add, however, that we do not need to wait for the infrastructure bank, since the Fed can and should do it. As Jerry Epstein (2006) has shown, in the past central banks have provided subsidized credit for industrial activities, and have acted as agents of development. So rather than wait for institutional innovation, current institutions can be put to work immediately.