Huge deficits will be omnipresent throughout President Obama's first term, complicating his administration's messaging efforts on the economy. But advisers separate the political repercussions from the actual underlying fiscal and monetary policies. In some ways, the short-term politics of the deficit are negligible. They're preferable to the short-term politics of a much higher unemployment rate with no economic growth -- and a smaller deficit.
What's more important, to the administration, at least, is the degree to which the deficit has an impact on market expectations and the behavior of market players. If the goal is to stimulate private sector job growth, how the market feels about deficits -- and to the degree that the deficits reduce the incentives for investment -- this is the site of the most important political interaction. More government spending, in the form of, say, a bailout of state and local governments or a second federal stimulus -- may not have enough support in Congress, but the private sector is where the White House believes that growth needs to come from -- the government has already provided a trillion dollars worth of stimulus. Having abandoned the concept of moral hazard to save the economy in 2009, the administration will use it to their advantage in 2010.