Besides, Obama also promised Tuesday night that 98 percent of American families, those earning less than $250,000, would not pay an extra dime in taxes. So to cut the deficit in half, he needs to raise taxes on the richest Americans and look for spending cuts.

He claims to have found $200 billion per year in spending we can do without. Assuming those spending cuts actually materialize, that still leaves $500 billion in higher taxes for the richest Americans.

In 2006, the latest year we have data for, the top 2 percent of tax returns yielded around $500 billion in revenue. So to cut the deficit in half, Obama will have to roughly double the tax rates on the top 2 percent. I don't think that strategy will be politically viable or economically productive.

What I think will happen instead, is that he will simply settle for running larger deficits for a while, continuing to borrow money from our fellow citizens and from foreigners, and hoping that the interest rates we offer on those loans don't start to rise because people start to realize that no asset, even treasuries, is risk-free.

The cheery scenario is the economy grows like gangbusters and tax revenues surge without increases in rates. Could happen, but I am not optimistic. Too many unknowns lie ahead.

Every president who inherits a deficit promises to cut it somewhere down the road. Only one president in recent years has kept that promise — Bill Clinton. But he was helped by six years of Republicans in the House and Senate. When the White House and the Congress are from the same party, it's very hard to say no to key constituencies that expect rewards for past support. If Obama is really serious about cutting the deficit down the road, he will almost certainly have to fight with his own party.

Russell Roberts is an economics professor at George Mason University, a distinguished scholar in the Mercatus Center and a research fellow at Stanford University's Hoover Institution. He is the host of the weekly podcast, EconTalk. His latest book is The Price of Everything: A Parable of Possibility and Prosperity.

You could try to master the empirical evidence of each side. Perhaps one side is more persuasive than the other. Let me suggest a simpler strategy that gets at the underlying philosophic disagreement that I suspect is the heart of the matter.

Consider two different government programs for stimulating the economy. The first program borrows $819 billion and hires and pays groups of workers $819 billion to dig a bunch of holes and then fill them in. The second program spends $819 billion to repair a bunch of bridges on the verge of collapse, repair a bunch of sewers about to go bad, and revolutionize the energy and health sectors.

I think most economists would argue that the first program would be a bad use of federal money at a time when we're already running a growing budget deficit. Yes, it would put money in the hands of workers but the effect on the non-hole-digging part of the economy would be insufficient to justify increasing the future taxes necessary to repay the borrowing that financed the program. Most economists would also agree that the second program would be a bargain that would yield benefits well beyond the money put in the hands of those executing the project.

I think the disagreement among economists is really over which of these two scenarios is closest to reality. The federal budget is about $3 trillion. Is the next $500 billion or so money well spent or money squandered?

I think it will be mostly squandered, so I'm against the stimulus. Plenty of people think it would be money well spent. Many people want a role for government closer to that of Europe's. Most of us against increased government spending want to move in the other direction.

There is an underlying presumption in this debate that if the spending package doesn't stimulate the economy, then tax cuts or monetary policy are better. But maybe we simply don't have the knowledge to repair the economy from Washington. The economy is complex and the interaction between the financial sector and the real economy - between Wall Street and Main Street - is not well understood.

Rather than spending money we don't have, I wish Obama would use his political capital to change the parts of our political system that are dysfunctional - our entitlement programs that are demographically bankrupt, our broken budget system, our Byzantine tax system, our financial system that is in disarray. These changes would be more likely to create the confidence and trust in the future that our economy needs to get healthy again rather than borrowing and spending. Borrowing and spending is how we got into this mess. Let's look in a different direction.

Russell Roberts is professor of economics at George Mason University and a research fellow at Stanford's Hoover Institution. He is the host of the weekly podcast EconTalk.

The argument for a massive spending increase presumes that spending is the source of our prosperity. But it is the combination of prudent spending and prudent investment that creates prosperity.

I would like to guarantee that we in Washington would spend an additional trillion dollars or so wisely. I would like to guarantee that such spending would be free of pork and the influence of the powerful. But those guarantees would be empty promises. As a former senator, I know the temptations of power and influence that are unleashed when a trillion dollars are slopping around in the government trough.

And would a trillion-dollar increase in the federal budget deficit enhance investor or consumer confidence? What costs will a spending increase of that magnitude impose on not just future generations but on this generation next year and the year after?

Trillions of dollars of annual red ink puts at risk the government's ability to keep its promises. That will discourage private investment and private spending, imperiling any recovery that might take place based on private initiative.

Finally, adding a trillion dollars to an already bloated federal budget is another sign that we in Washington are irresponsible and unable to live within our means. It is that failure of will and discipline that helped create the current situation--a belief that we could have cheap credit and ever-expanding home ownership without any consequences.

A massive increase in spending on hurried projects of uncertain value, financed by borrowing, is a promise to raise taxes in the future and to squander resources in the meanwhile. That is not the road to recovery. That is not the road to prosperity.

What is needed instead is a set of steps to stimulate the productive side of our economy. A tax rebate of either the payroll tax or the income does not stimulate investment. There is no evidence that rebates even stimulate spending. Rebates do not change the incentives of consumers to spend or savers to invest. Past rebates have consistently failed to encourage economic activity.

Instead, I'm proposing today a radical re-imagining of our tax system. I am recommending the elimination of the payroll tax. The payroll tax is a regressive tax that falls harshly on the poor. And it is deceptive, an unacceptable characteristic of a tax in a democracy.

Half of the payroll tax appears to be paid by employers. In fact, studies of the payroll tax show that the employer merely lowers worker compensation in response to the tax burden. So workers pay virtually the entire 15%.

Worse, the payroll tax gives the illusion that taxes are "contributions" toward future social security payments. In fact, the payroll tax is used to finance current recipients of Social Security and Medicare along with other government spending such as the war on Iraq and welfare for wealth farmers.

This fools workers into thinking such programs are cheaper than they actually are. This artificially encourages the demand for such programs.

Unlike a temporary rebate of payroll taxes, eliminating the payroll tax will change incentives facing firms and workers. The result will be job creation and increased worker compensation. The permanence of the change raises the effectiveness of that encouragement, again in contrast to a temporary rebate.

But eliminating the payroll tax without reforming the budget and entitlement programs would be irresponsible and would rob the tax cut of much of its kick.

The payroll tax currently generates about $700 billion. We will pay for that reduction with three other changes:

--Eliminating all corporate welfare. Corporate welfare rewards those corporations that excel at lobbying rather than serving their customers. Eliminating it will save $100 billion annually.

--Implementing spending reductions in all departments of 10%, saving over $250 billion. Such cuts in a federal budget heading toward $3 trillion are hardly draconian. They merely return spending to the level of a year or two ago.

--Making small across-the-board increases in the income tax rate, yielding $350 billion. The poorest workers will in fact see a significant improvement in their after-tax income because the elimination of the payroll tax will overwhelm the increase in income taxes. The richest Americans will see a slightly larger increase because their payroll tax contributions are currently capped.

At the same time, I will appoint two bipartisan commissions to reform the budget process itself and the Social Security and Medicare programs. The budget process is out of control. Signaling to the private sector that the public sector will live within its means and avoid the erratic behavior of the past year will go a long way toward rejuvenating the economy. So will reform of Social Security and Medicare.

Social Security and Medicare are not viable in their current form given our demographics. For 70 years we have pretended that they are insurance programs. In fact, they are welfare programs that also help the rich in the name of generating support for the system. It is absurd for wealthy Americans to be part of a retirement and health system when they have the wherewithal to take care of themselves without government help.

The system isn't financially bankrupt--yet. But it is intellectually bankrupt. Why should today's workers pay for today's retirees in the expectation that future workers will do the same for them? Why should a poor worker of today send money to a wealthy retiree? There is a name for such schemes and it is not a pretty one. It would be far better to let those who are capable of taking care of themselves do so, while putting aside money for those unable to take care of themselves.

In short, I propose that Social Security and Medicare become means-tested safety nets for the truly needy, rather than a fake pension and insurance program with a hidden welfare component. The commission I appoint will design a gradual transition over time to such a transparent system, allowing today's workers to plan honestly for the future.

One method of transforming Social Security and Medicare will be to make them means-tested and make the welfare components explicit rather than buried and opaque as they are now.

Ultimately, this will allow for lower tax rates. Those expected lower tax rates will help encourage current spending because consumers will not have to worry about future tax increases.

If we have the courage to implement this plan of fiscal responsibility and a more transparent tax system with improved incentives, it will let the private sector know that the grown-ups are in charge and that the government can be trusted to act responsibly.

This will in turn encourage the risk taking and investment that must take place before our economy can recover. And most importantly, we will set the stage for future prosperity.

Thank you and God bless America.

Russ Roberts is a research fellow at the Hoover Institution, a professor of economics at George Mason University, and the host of a weekly podcast, EconTalk. His latest book is The Price of Everything: A Parable of Possibility and Prosperity.

But reviving an economy is more like parenting. There's no manual. If there were a parenting manual, every hospital would hand one out with every newborn. But there isn't a manual because each kid is different. And parents come to learn that they aren't really in charge. There's too much of the process they can't control. So great parenting isn't about doing whatever it takes. It's an art. It's about a set of principles and knowing which principle to apply in which situation. When to be tough. When to be soft. When to give a kid a do-over.

Even the most skilled parents make mistakes. Not because they don't understand what it takes to be a good parent. Not because they aren't committed to doing the job as well as it can humanly be done. But simply because there's no way of knowing what to do next.

Often what's called for in parenting is the exact opposite of whatever it takes--what's called for is doing nothing.

Welcome to the world of macroeconomics. Even the wisest president and most skilled secretary of the Treasury doing whatever it takes isn't enough if you don't know what it takes. And there's no way of knowing.

Look at poor Henry Paulson. He can't figure out what to do. But you think it's easy? To revive financial markets, he just has to create confidence and a desire to invest. Piece of cake. Alas, no one knows how to do it. And it isn't from lack of trying. Or desire. Paulson's successor will have one advantage Paulson doesn't have. He'll know something about what not to do. But unfortunately, that isn't enough.

After all the changes in policy and the uses of the TARP that have been announced in the last six weeks, I suspect that confidence and a desire to invest are no longer under the control of the Treasury secretary or the president. If anything, many of Paulson's relentless efforts to move markets forward have made the situation worse.

Obama may promise whatever it takes, but the unfortunate reality is that he faces the same situation that Bush and Paulson have been facing. We need confidence and optimism, but there's no way of knowing how to get there from here.

Obama's only practical suggestion has been to support the idea floating around Congress for a stimulus package of $100 billion or more.

That doesn't exactly meet expectations of doing whatever it takes. That's doing what we've already done.

We tried a $160 billion stimulus package last spring. That accomplished very little. What's the argument for spending $100 billion to revive a $14 trillion economy? A $14 trillion economy where the government has just spent a few hundred billion and counting on financial bailouts and capital injections. To no avail. Does anyone really think that we haven't spent enough?

Somehow, I don't think an extra $100 billion or even $300 billion is going to get the job done, even if it goes toward infrastructure as some are suggesting.

What if markets are spooked by the specter of government spending without any constraints? What if doing whatever it takes means doing less, rather than more?

That is the conundrum for Obama and the successor to Paulson. The more options there are, the harder it is to know which one is the right one. The more options you try, the more uncertainty is injected into the economy, and the more cautious are investors and employers and consumers.

Nobody knows what it takes to move the economy forward right now.

We did enough of that for a while. More than enough. Too much. And right now, before we spend, spend, spend, we're going to wait and see if we keep our jobs.

But we're also going to wait and see what the government's going to do next. Nobody knows, and that evidently includes the secretary of the treasury.

When no one knows how the rules of the game are going to change — and they seem to change from week to week — who wants to take a risk? Who wants to borrow money? Who wants to invest? Business and consumers are hunkering down, waiting for the storm of change to pass.

The problem isn't liquidity.

It's uncertainty.

Paulson doesn't realize that his erratic attempts at creating liquidity are creating the uncertainty that makes liquidity meaningless.

And his erratic moves elsewhere just add to the uncertainty. A few days ago, he announced that he was "exploring strategies" to use the TARP (the Troubled Asset Relief Program) for "foreclosure mitigation." Then came the news that, no, the FDIC would have to go it alone in helping mortgage workouts. No TARP for them.

I guess he's done exploring. At least until tomorrow.

As the TARP spreads, the cost will keep rising. Remember the talk about how the government might even profit from its $700 billion "investment?" (Insert hollow laugh here.)

I'd feel better if the money spent so far was helping. But there's no evidence that it is achieving what Paulson intends.

And who's going to pay for all of this? Those who lived within their means, who went with the smaller house, who waited a few more years to get that new car, who took a part-time job rather than borrowing even more money to pay for college. Suckers. You missed out on the thrills and now you're going to be paying the bills. The prudent will be paying for the imprudent for a long time.

The great economist F.A. Hayek wrote that "the curious task of economics is to demonstrate to men how little they really know about what they imagine they can design."

With each improvisation, Secretary Paulson is proving how little he knows about what he imagines he can design.

Russell Roberts is professor of economics at George Mason University and a research fellow at Stanford's Hoover Institution. His latest book is The Price of Everything: A Parable of Possibility and Prosperity.

It's just like the New Deal: a massive accumulation of power in Washington justified by the need to do something. There is every reason to think this trend will accelerate regardless of whether Barack Obama or John McCain wins the election.

Back in March, Henry Paulson, Ben Bernanke and the experts assured us that Bear Stearns had to be propped up. If not, the whole system could come crashing down. It is crashing down anyway. Just as in the 1930s, there is no evidence that the policy makers have any understanding of what they are doing. They need to make way for the natural forces of repair.

They need to let housing prices fall. They need to let firms go bankrupt. They need to let firms that are healthy thrive. They need to let healthy firms buy the sick firms. It is time to let the imprudent fail and the prudent pick up the bargains.

A recession is coming (or has already arrived) no matter what happens in Washington. The question is whether the attempt to forestall it is going to make it worse and turn it into another Great Depression.

By acting without rhyme or reason, politicians have destroyed the rules of the game. There is no reason to invest, no reason to take risk, no reason to be prudent, no reason to look for buyers if your firm is failing. Everything is up in the air and as a result, the only prudent policy is to wait and see what the government will do next. The frenetic efforts of FDR had the same impact: Net investment was negative through much of the 1930s.

The next administration is unlikely to do any better. Mr. Bernanke is perhaps the greatest living authority on the Great Depression, yet he has failed to stem the damage. Messrs. Paulson and Bernanke are confronted with a sick patient. They have antibiotics. They have a scalpel. But is there any evidence from the last seven months that they understand the underlying cause of the illness, or how to cure it?

Worst of all are the political incentives that are unleashed when Washington promises to spend a trillion dollars (and counting). No one can spend such money wisely even if they want to. The information about who needs to be bailed out and who needs to fail is too complicated. Inevitably, such decisions will begin to be more about politics than economics.

The banks were first. Then the insurance companies. The car makers are getting a cut. Who's next? The governors, probably. Homeowners are waiting. Then there will be the hedge funds. Once the line forms, companies will stop trying to save themselves and focus on being saved by Washington. The resulting spiral will be devastating.

Unfortunately, there is no consensus about a preferable alternative. The economists are almost as clueless as the politicians. At such a time, inaction may be the wisest course of action.

Mr. Roberts is a professor of economics at George Mason University and a research fellow at Stanford University's Hoover Institution. His latest book is "The Price of Everything: A Parable of Possibility and Prosperity" (Princeton University Press, 2008).

Beginning in 1992, Congress pushed Fannie Mae and Freddie Mac to increase their purchases of mortgages going to low and moderate income borrowers. For 1996, the Department of Housing and Urban Development (HUD) gave Fannie and Freddie an explicit target -- 42% of their mortgage financing had to go to borrowers with income below the median in their area. The target increased to 50% in 2000 and 52% in 2005.

For 1996, HUD required that 12% of all mortgage purchases by Fannie and Freddie be "special affordable" loans, typically to borrowers with income less than 60% of their area's median income. That number was increased to 20% in 2000 and 22% in 2005. The 2008 goal was to be 28%. Between 2000 and 2005, Fannie and Freddie met those goals every year, funding hundreds of billions of dollars worth of loans, many of them subprime and adjustable-rate loans, and made to borrowers who bought houses with less than 10% down.
Hear No Evil

What some Congresspeople said about Fannie and Freddie.

Fannie and Freddie also purchased hundreds of billions of subprime securities for their own portfolios to make money and to help satisfy HUD affordable housing goals. Fannie and Freddie were important contributors to the demand for subprime securities.

Congress designed Fannie and Freddie to serve both their investors and the political class. Demanding that Fannie and Freddie do more to increase home ownership among poor people allowed Congress and the White House to subsidize low-income housing outside of the budget, at least in the short run. It was a political free lunch.

The Community Reinvestment Act (CRA) did the same thing with traditional banks. It encouraged banks to serve two masters -- their bottom line and the so-called common good. First passed in 1977, the CRA was "strengthened" in 1995, causing an increase of 80% in the number of bank loans going to low- and moderate-income families.

Fannie and Freddie were part of the CRA story, too. In 1997, Bear Stearns did the first securitization of CRA loans, a $384 million offering guaranteed by Freddie Mac. Over the next 10 months, Bear Stearns issued $1.9 billion of CRA mortgages backed by Fannie or Freddie. Between 2000 and 2002 Fannie Mae securitized $394 billion in CRA loans with $20 billion going to securitized mortgages.

By pressuring banks to serve poor borrowers and poor regions of the country, politicians could push for increases in home ownership and urban development without having to commit budgetary dollars. Another political free lunch.

Fannie and Freddie and the banks opposed these policy changes at first through both lobbying and intransigence. But when they found out that following these policies could be profitable -- which they were as long as rising housing prices kept default rates unusually low -- their complaints disappeared. Maybe they could serve two masters. They turned out to be wrong. And when Fannie and Freddie went into conservatorship, politicians found out that budgetary dollars were on the line after all.

While Fannie and Freddie and the CRA were pushing up the demand for relatively low-priced property, the Taxpayer Relief Act of 1997 increased the demand for higher valued property by expanding the availability and size of the capital-gains exclusion to $500,000 from $125,000. It also made it easier to exclude capital gains from rental property, further pushing up the demand for housing.

The Fed did its part, too. In 2003, the federal-funds rate hit 40-year lows of 1.25%. That pushed the rates on adjustable loans to historic lows as well, helping to fuel the housing boom.

The Taxpayer Relief Act of 1997 and low interest rates -- along with the regulatory push for more low-income homeowners -- dramatically increased the demand for housing. Between 1997 and 2005, the average price of a house in the U.S. more than doubled. It wasn't simply a speculative bubble. Much of the rise in housing prices was the result of public policies that increased the demand for housing. Without the surge in housing prices, the subprime market would have never taken off.

Fannie and Freddie played a significant role in the explosion of subprime mortgages and subprime mortgage-backed securities. Without Fannie and Freddie's implicit guarantee of government support (which turned out to be all too real), would the mortgage-backed securities market and the subprime part of it have expanded the way they did?

Perhaps. But before we conclude that markets failed, we need a careful analysis of public policy's role in creating this mess. Greedy investors obviously played a part, but investors have always been greedy, and some inevitably overreach and destroy themselves. Why did they take so many down with them this time?

Part of the answer is a political class greedy to push home-ownership rates to historic highs -- from 64% in 1994 to 69% in 2004. This was mostly the result of loans to low-income, higher-risk borrowers. Both Bill Clinton and George W. Bush, abetted by Congress, trumpeted that rise as it occurred. The consequence? On top of putting the entire financial system at risk, the hidden cost has been hundreds of billions of dollars funneled into the housing market instead of more productive assets.

Beware of trying to do good with other people's money. Unfortunately, that strategy remains at the heart of the political process, and of proposed solutions to this crisis.

Mr. Roberts is a professor of economics at George Mason University and a scholar at the Mercatus Center. His latest book is a novel on how markets work, "The Price of Everything: A Parable of Possibility and Prosperity" (Princeton University Press, 2008).