My column for today's FT looks beyond the stimulus to what comes later.
It is safe to assume that in his address on Tuesday, Barack Obama will invoke the need for shared sacrifice. The idea is a banker, forgive the expression, for any inaugural, but especially now. Equally predictable is that he will develop the theme with a certain inattention to detail. It is inspiring to call for sacrifice but something of a downer to tell people too precisely what that sacrifice is going to be. Allow me to shoulder this burden.
The US economy's perilous condition calls for extreme fiscal activism. The new administration's stimulus plans are by no means over the top. If anything, a fiscal injection of $800bn over two years is too modest. But the implication of so strong a fiscal boost is a swift and severe worsening of the country's long-term fiscal position.
During his eight years in office - fat ones, for the most part, from a fiscal point of view - President George W. Bush moved the budget balance from surplus to structural deficit. Demographic and other pressures will worsen the position over the next decade or two. Now comes a fiscal expansion that will be only partly counter-cyclical: some of the new president's spending will not reverse automatically as the economy recovers. A structural deficit of the sort taking shape is unsustainable and will be corrected one way or the other - if not by a timely change in policy, then by a new and potentially even worse financial calamity.
What would it take for the milder of these alternatives to prevail? The short answer, once the economy has recovered, is this: higher taxes.
You can read the rest of it here.