Concerns over the public debt make it highly unlikely that the government will pass any sort of fiscal stimulus anytime soon. Of course, that might not make much of a difference -- Congress passed stimulus bills in 2008 and 2009 and a much smaller jobs bill this year, and the economy is still sluggish and we still have lost net 2.4 million jobs since February 2009. The coming tax increase on incomes, estates, capital gains, and dividends won't help recovery, either. And to make matters worse, fears of deflation may become self-fulfilling. Yokohama, here we come.

One way out might be for the Fed to engage in some creative monetary stimulus. In his testimony to Congress yesterday, Ben Bernanke said the Fed could act, but has decided not to. In the coming months, however, the Central Bank may no longer have that choice. An extended period of sluggish growth and joblessness, as the country crawls out from under a massive debt burden made worse by deflation, would have major -- and majorly unpleasant -- social and political consequences.

Joseph E. Gagnon, an economist at the Peterson Institute, presents the case for monetary stimulus here. He writes:

The Federal Reserve's own forecast shows that it will take at least three or four years for employment to return to its long-run sustainable level. This extended period of high unemployment represents a massive waste of productive labor and untold personal suffering of unemployed workers. The Fed should be aiming to get us back on track within two years. And the urgency of Fed action is all the more important because Congress has refused to provide more stimulus.

In addition, it is now apparent that deflation is a more serious risk for the US economy than inflation. The latest data show overall declines in consumer and producer prices. Even after excluding the volatile food and energy components, core inflation has trended well below the 2-percent level that central banks view as optimal for economic growth and that the Fed has adopted as its goal.

Gagnon's policy has three components. He would lower to zero the interest the Fed pays on reserves in order to incentivize a heightened velocity of money. He would have the Fed purchase 3-year Treasuries in order to bring the yield for those bonds to .25 percent (a move once advocated by Ben Bernanke himself). And he would have the Fed establish a new lending facility for banks in order to get credit moving.

To be sure, none of these policies would come without costs. And they may not even produce the desired benefits. It may be that we have entered a truly new economic environment in which the old fiscal and monetary tools are simply useless. If that is the case, then even more radical policy ideas may have to be considered. But before we reach that point, we ought seriously to consider the economic, social, and political ramifications if the current situation continues indefinitely, and do everything in our power to get back to growth. Something's got to give.

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