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Barbell Approach Only Way to Lift Heavy Economy

Author: Peter R. Orszag, Adjunct Senior Fellow
June 6, 2012
Bloomberg.com

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Despite the hoopla over last week's jobs numbers and Tuesday's long-term fiscal outlook from the Congressional Budget Office, the underlying reality of the U.S. economy hasn't changed all that much lately. We are still in the midst of the hard slog following the financial crisis, and we still face a massive long-term government budget deficit.

Let's hope that dismal combination is all we face -- because things might be about to get much worse. Europe stands on the brink of economic disaster, which at its worst could easily trigger another outright recession in America. Foreign deposits in Spanish banks amount to about 500 billion euros ($622 billion). It isn't difficult to imagine those depositors changing their minds about such an asset allocation. That could prompt deposit flight in other southern-tier banking systems, which the European authorities couldn't contain.

The U.S. desperately needs more fiscal insurance against such a shockwave.

The right policy, which also happens to be the only one with any hope of being adopted in the foreseeable future, is a barbell approach, with more stimulus on one side and, on the other, more deficit reduction enacted now to take effect over time. That would attack both the weak labor market revealed in last week's jobs report and the long-term fiscal gap that the CBO highlighted on Tuesday. If we could enact such a dual plan immediately -- which is admittedly hard to see happening, even though it has been embraced by some Republicans -- it would give us much-needed credibility in our efforts to urge the Europeans to act on their own problems before it's too late.

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