Joseph Stiglitz sees stagflation on the horizon. If it does hit, what's a fiscal policy wonk to do?

For those who think that a well-managed globalisation has the potential to benefit both developed and developing countries, and who believe in global social justice and the importance of democracy (and the vibrant middle class that supports it), all of this is bad news. Economic adjustments of this magnitude are always painful, but the economic pain is greater today because the winners are less prone to spend.

Indeed, the flip side of "a world awash with liquidity" is a world facing depressed aggregate demand. For the past seven years, America's unbridled spending filled the gap. Now both US household and government spending is likely to be curbed, as both parties' presidential candidates promise a return to fiscal responsibility. After seven years in which America has seen its national debt rise from $5.6tn to $9tn, this should be welcome news - but the timing couldn't be worse.

Stiglitz is more or less advocating a deficit-financed fiscal stimulus that targets the middle and lower class. People as different as Robert Reich, Larry Summers and Martin Feldstein have shown that they're open to a fiscal stimulus package, should the need arise.

Question: when was the last time this country's leaders seriously considered offering a truly Keynsian stimulus package, one that was deficit financed and tried to raise aggregate demand by increasing the purchasing power of the lower and middle class? The Reagan and Bush stimulus packages targeted the wealthy, and as far as I know, Clinton wasn't in to deficits.

Brookings is having an event in a couple days where fiscal stimulus will be discussed by some heavyweights in the economics world (with the notable exception, as is customary in discussions of macroeconomic policy, of anyone that can be credibly identified with the left). Should be interesting to see what possibilities they entertain and rule out.

President Bush signed a short-term extension of the State Children's Health Insurance Program last Saturday. The bill is supposed to ensure that nobody will be cut from the program as it is now, but it also makes expanding it a non-issue until 2009, since the extension lasts until April 2009.

In other words, the 4 million children who would have been covered under the vetoed SCHIP expansion will go without health insurance for at least another year, thanks to the president and the conservative coalition in the House.

CBO released its long-term budget outlook yesterday. Here's CBO Director Peter Orszag's testimony and the report itself. Key excerpt:

The rise in health care spending is the largest contributor to the growth projected for federal spending. Therefore, efforts to reduce overall government spending will require potentially painful actions to slow the rise of health care costs. There may be ways, however, in which policymakers can reduce costs without harming the health of Medicare and Medicaid beneficiaries. Changing those programs in ways that reduce the growth of costs—which will be difficult, in part because of the complexity of health policy choices—is ultimately the nation's central long-term challenge in setting federal fiscal policy.

You'd think that the fiscal policy community would respond to this message by calling for a redoubled effort into controlling health care costs. But to Robert Greenstein, executive director of the Center on Budget and Policy Priorities, the long-term outlook means that we should focus our efforts on enforcing PAYGO budgeting rules.

Moreover, enforcing Pay-As-You-Go rules — and paying for any tax cuts Congress elects to extend (and any entitlement increases) — is within policymakers' power. In contrast, as CBO explains, we probably won't be able to secure the needed reductions in projected Medicare and Medicaid costs without causing serious harm to low-income and elderly patients unless we can slow cost growth throughout the entire U.S. health care system. And while this is the nation's most important fiscal challenge, there is currently no consensus among health care experts about how to accomplish it; achieving such a consensus and fully implementing the appropriate policies could take years or decades.

Why doesn't he ask to speed this process up? Put more money into research, experiment with incentives, implement what the research has already found, ANYTHING that would actually solve the problem, instead of just keeping it from getting worse. He could be asking Congress to both enforce PAYGO and reduce costs. But he clearly prioritizes PAYGO way over trying to control costs now, I guess because he thinks there's nothing we can do. There's plenty to do.

Plus, waiting around for a consensus seems pretty silly. There's no consensus on what to do about a lot of things- basically everything. And the consensus is often wrong. It wasn't that long ago that there was a consensus that the only way to close the long-term budget gap was to raise taxes and cut benefits.

This attitude won't solve the problem. It's a recipe for a continuation of the status quo. At least Orszag gets that much greater emphasis needs to be put on containing health care costs, because that's the most important problem, and not enough is being done about it. Why doesn't CBPP get that we CAN do something about health care costs now? Am I missing something?

Perhaps it's too soon to write a post-mortem on the budget debate. Particularly because the Coalition on Human Needs just put out a good summary of how the Bush cuts would impact people, and since they're asking for advocates to call Congress in support of human needs programs.

But here's one anyway. The best message was the "Republicans don't want to to spend money on program X, but they'll spend obscene amounts on Iraq." It probably did a lot of damage. It clarified the hypocrisy and misplaced priorities of their stance and smeared it with the taint of one of the least popular decisions they've made.

But I never heard, or came up with, a good message in favor of the Democrats' budget proposals. Basically we'd trot out some program they knew everybody liked and say "look, support our entire budget because we want to fund popular program X." I think that message was a lot less compelling, judging by the lack of a strong base of support for the Democratic proposals.

Basically, nobody's going to the mat over these budget proposals. Not the appropriations committees, not the leadership. I just don't think anybody's really holding their feet to the fire.

So one immediate thing to take away might be that a compelling critical message is insufficient, given that the hard right still wields considerable power over legislation and will most likely never be deterred willingly. Then again, solid messages on both fronts may not be enough. Next year might be even worse. The opposition, unfortunately, has probably been emboldened by their wins, and the good(er) guys are getting burned by looking "weak" in the press.