Major procedural reforms will be needed as well. One essential step is the implementation of "pay-as-you-go" rules, which require that all increases in spending or tax cuts be financed by savings elsewhere in the budget. The statutory creation of a "fiscal future commission"—modeled on the Defense Base Closure and Realignment Commission, a federal body whose recommendations are subject to an up-or-down vote in Congress—could represent a major breakthrough. It might even be time to reconsider passing a balanced-budget amendment to the US Constitution, a provision that exists in nearly all US states and is now being pursued in a somewhat analogous form by the European Union. Whatever the specific policy approach, the underlying objective should be to create a system that will achieve a balanced budget over the course of the economic cycle.

A responsible fiscal policy would permit the Federal Reserve to run a relatively easy monetary policy, which would hold down interest rates and prevent overvaluation of the dollar. If the Obama administration is looking for a historical model, it should aim to replicate the Clinton-Greenspan policy of the late 1990s (a mix of budget surpluses and low interest rates) rather than the Reagan-Volcker policy of the early 1980s (a mix of large deficits and high interest rates).

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Filed under: * Economics, Politics • Economy • The Credit Freeze Crisis of Fall 2008/The Recession of 2007-- • The U.S. Government • Budget • Federal Reserve • The National Deficit • The United States Currency (Dollar etc) • Treasury Secretary Timothy Geithner • Politics in General • House of Representatives • Office of the President • President Barack Obama • Senate

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