“Watch what we do, not what we say,” President Nixon’s attorney general told the press. Unfortunately for both men, the press eventually did that, and we got the first of the “gates:” Watergate. The consequences for President Obama of watching what he does rather than what he says will be less dire, but nevertheless revealing.

Americans overwhelmingly say that their main concern is jobs, and that they are satisfied with their current health care arrangements. In response, an allegedly chastened President Obama “pivoted,” and says his primary concern from now on will be job creation, which will take priority over his controversial plan to radically change the nation’s health care system.

Yet, last week he backed a $15 billion job-creation bill, which passed the Senate, and a $1 trillion health care bill. Since the federal balance sheet is already under huge pressure, this set of priorities tells us that the Obama administration intends to concentrate available resources on transforming the economy -- a long-term, permanent restructuring of the health care and energy sectors that was planned long before the failure of Lehman Brothers triggered the financial mess Obama inherited.

Not that the president will try to rein in stimulus spending: more is in the pipeline. Which is why Federal Reserve Board chairman Ben Bernanke warned congress last week that although it is too soon to turn off stimulus spending, it must address the structural deficit -- the red ink that will continue to flow even when the economy has recovered. Bernanke says that structural deficit will run somewhere between 4 percent and 7 percent of GDP, well above the sustainable level of 2.5 percent - 3 percent or less. He also told the assembled congressional committee -- television coverage insures good attendance by committee members -- that if the congress and the president don’t soon plan to attack the structural deficit, the market might decide that enough is enough, and interest rates would rise.

Investors are watching not only the size of the federal deficit, but of state deficits as well, since they are guessing that in the end the federal government will not allow state governments to go bust. Instead, if the states can’t satisfy their creditors, the federal government will take their $146 billion of debts onto its own balance sheet, raising its deficit to 11.6 percent of GDP. And that doesn’t count the $1,000 billion funding gap in state pension reserves.

But austerity is for later. Now, policy makers and politicians worry that the economic recovery is showing signs of premature ageing. New home sales fell in January to an all-time low annual rate of 309,000 units. Mortgage applications plummeted. The number of loans past due by 30 days is the second highest on record. In short, the important housing sector is still struggling.

Janet Yellin, president of the San Francisco Federal Reserve Bank, doesn’t see the economy hitting its full stride until 2013. Bernanke is predicting “low rates of resource utilization” -- econospeak for high unemployment and unused factories -- and “an increasing incidence of long-term unemployment” for some time to come. And he worries that commercial property loans that are unlikely to be repaid will bring down more small and medium banks. The number of banks on the Federal Deposit Insurance Corporation’s “problem” list stood at 702 at the end of last year, up from 252 a year earlier.

Given news of this sort, it should come as no surprise that consumer confidence is plunging: Consumers’ assessment of current economic conditions is at its lowest level in 27 years. Add to gloomy consumers banks that don’t want to lend or businesses that don’t want to borrow (depends who you talk to), businesses that are reluctant to hire, and an anti-business government, and there is reason enough for worry. President Obama did attempt to rebut those who accuse him of having little faith in market capitalism by spending part of last week trying to reassure business leaders -- primarily heads of the nation’s largest companies -- that he is not a socialist, that he is deeply committed to the private enterprise system, and that his plans to raise taxes on foreign earnings, on banks, and on “the wealthy” are merely a rebalancing of inequities introduced by his predecessor. One top White House economist tells me that he spends a considerable amount of energy damping down the president’s anti-business rhetoric.

Any hope for an export-led recovery seems to be receding as European growth stalls, several countries are being forced to institute austerity programs, and turmoil in the market for sovereign debt drives interest rates higher. Even China, which American businessmen have for decades seen as a huge potential market for their products, is reining in credit to cool the economy, and persists in an import-unfriendly set of policies.

All of this has produced an important change in policies. Scrooge has become Lady Bountiful: The International Monetary Fund, long famous for prescribing austerity as the medicine for ailing economies, now warns that it is too soon to start reining in budget deficits. Bernanke more or less agrees, although he wants the U.S. to begin formulating plans to reduce the structural deficit once anti-recession spending winds down. This is music to the ears of politicians such as Barack Obama and British Prime Minister Gordon Brown, both presiding over massive deficits, both facing elections, both unwilling to cut spending just yet, if ever.

The rating agencies and investors in sovereign debt are less enchanted with the newly blessed profligacy, and it may well be that in the end the bond markets will dictate policy by forcing interest rates up to growth-stifling levels unless the government cuts its deficit. Recall that James Carville, one of Bill Clinton’s advisers, frustrated at his inability to get his spending programs adopted, lamented, “I used to think that if there was reincarnation, I wanted to come back as the president or the pope or a .400 baseball hitter. But now I want to come back as the bond market. You can intimidate everybody.”

For now, it is safe to assume that the government will keep on spending, deficits will continue rising, and the Fed will keep interest rates low. That delicious, heady cocktail of loose fiscal policy -- congress is busily drafting more stimulus bills as you read this -- and easy monetary policy will, Bernanke says, produce growth of 3 percent - 3.5 percent this year, and 4 percent next year. With little inflation. Rather like the old airline slogan, “Fly now, pay later.”

Irwin M. Stelzer is a contributing editor to THE WEEKLY STANDARD, director of economic policy studies at the Hudson Institute, and a columnist for the Sunday Times (London).

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