If households curtail their spending quickly—as they may be forced to do as a result of the meltdown in the mortgage market—this could mean a recession. If the curtailment happens in a more measured way, it would still mean a protracted slowdown. And the problems of foreclosure and bankruptcy posed by excessive household debt are likely to get worse before they get better. So the federal government is in a bind: any quick restoration of fiscal sanity will only aggravate both problems.
What is required is in some ways simple to describe: it amounts to ceasing our current behavior and doing exactly the opposite. It means not spending money that we don’t have, increasing taxes on the rich, reducing corporate welfare, strengthening the safety net for the less well off, and making greater investment in education, technology, and infrastructure.
When it comes to taxes, we should be trying to shift the burden away from things we view as good, such as labor and savings, to things we view as bad, such as pollution. With respect to the safety net, we need to remember that the more the government does to help workers improve their skills and get affordable health care, the more we free up American businesses to compete in the global economy.
Think of the interest we are paying, year after year, on the almost $4 trillion of increased debt burden. Even at 5 percent, that’s an annual payment of $200 billion -- two Iraq wars a year, forever. Think of the taxes that future governments will have to levy to repay even a fraction of the debt we have accumulated. And think of the ever widening divide between rich and poor in America as buying power fades for many who once confidently considered themselves middle class. This is a phenomenon that goes beyond economics and speaks to the very future of the American Dream.
http://www.vanityfair.com/politics/features/2007/12/bush200712
