Budget policy next year if Obama wins

Jason Furman is apparently telling budget hawk Congressional Democrats that Obama would seek to establish "a government unified around the concept of fiscal discipline and centered around the pay-go rule. Insisting on paying for things will lead to better economic policy."

Does this contradict the need for short-term fiscal stimulus if things keep looking ugly? In a word, no. Stimulus is about the current outlays and revenues; fiscal discipline about the long-term relationship between them. Thus, you can have a big stimulus package that increases the current year deficit but is fully financed over the long term. Farsighted, non-cash-constrained economic actors wouldn't be fooled into greater economic activity this year, but they're not the targets of the stimulus package. And note that pre-announced financing (such as future tax increases) can actually increase the incentive to invest, etc. today.

The harder problem is political. I know that Furman is serious about and understands the need for long-term balance, but politically it can be hair-raising to try to get there, especially given the unlikelihood of Republican cooperation.

Clinton in 1993 made the correct political calculation that you can act fiscally responsibly today and not pay the price three years later if the economy improves meanwhile. (Although possibly he paid a steep price in the 1994 midterm elections?) Obama in 2009, if he's elected, could try the same thing in terms of announcing changes but not implementing them, but unfortunately implementation might be what matters in terms of when the voters react.

If McCain wins, the degree of fiscal discipline would be wildly unpredictable, probably from day to day. He's committed to immense tax cuts, but it would be surprising if he weren't a budget hawk for at least a week or two somewhere along the way. Most likely there'd be a bunch of stunts, such as reverse shut-down-the-government brinksmanship, e.g., vetoing bills that are 1 percent earmark in the hope of either shifting blame to the Democrats or counting on bipartisan veto override to get himself off the hook.

Doug Holtz-Eakin claims that McCain would square the budgetary circle through huge Medicare cuts. Probably this helps Doug to feel good about what he's doing these days, but while the claim is undoubtedly sincere I'd be beyond shocked if it actually happened.