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I know I pointed out just yesterday how incoming presidents have a tendency to overpromise and sound so darn caring and sympathetic to all the diverse viewpoints surrounding them, but today’s headline in the Washington Post still makes me happy:  “Obama Pledges Entitlement Reform.”  From the story, which came out of a 70-minute interview with the Post’s editorial board and writers:

President-elect Barack Obama pledged yesterday to shape a new Social Security and Medicare “bargain” with the American people, saying that the nation’s long-term economic recovery cannot be attained unless the government finally gets control over its most costly entitlement programs.

That discussion will begin next month, Obama said, when he convenes a “fiscal responsibility summit” before delivering his first budget to Congress. He said his administration will begin confronting the issues of entitlement reform and long-term budget deficits soon after it jump-starts job growth and the stock market.

“What we have done is kicked this can down the road. We are now at the end of the road and are not in a position to kick it any further,” he said. “We have to signal seriousness in this by making sure some of the hard decisions are made under my watch, not someone else’s.”…

Obama repeated his assurance that there is “near-unanimity” among economists that government spending will help restore jobs in the short term, adding that some estimates of necessary stimulus now reach $1.3 trillion.

The president-elect said he believes that direct government spending provides the most “bang for the buck” and that his advisers have worked to design tax cuts that would be most likely to spur consumer and business spending.

But he framed the economic recovery efforts more broadly, saying it is impossible to separate the country’s financial ills from the long-term need to rein in health-care costs, stabilize Social Security and prevent the Medicare program from bankrupting the government.

“This, by the way, is where there are going to be very difficult choices and issues of sacrifice and responsibility and duty,” he said. “You have to have a president who is willing to spend some political capital on this. And I intend to spend some.”…

The president-elect has been in frequent conversation with lawmakers, including House Majority Leader Steny H. Hoyer (D-Md.) and the Blue Dog Coalition of fiscally conservative Democrats, who repeatedly told Obama they would be willing to support his stimulus package only if he pledged not to lose sight of the larger budget picture. Those who will be invited to attend the summit include the Blue Dogs, Senate Budget Chairman Kent Conrad (N.D.), ranking minority member Judd Gregg (N.H.) and a host of outside groups with expertise on the topics, the president-elect said…

“I know some people have said, ‘You have this big economic crisis on your hands, and so President Obama is going to just put off issues like this until his second term or later in his first term,’ ” he said. “I don’t think we have that luxury.”

He added: “That doesn’t mean that we close a deal or we have some big grand, you know, Camp David-type event early in my administration. It does mean that we have a team in place which is hitting the ground and starting to engage constructively.”… 

You see, even with the massive amounts of deficit-financed government spending everyone knows we’ll have to do over the next year or two, policymakers need to acknowledge that “strengthening the economy” over the next four years requires a sequence of two very different economic policy strategies.  In the short term, we need to stimulate consumption–whether it be personal consumption (which is very hard to do or expect right now) or government consumption–in order to fill up the economic-activity hole and use up/employ some of our economy’s currently idle capacity.  In the longer run, we need to stimulate saving–the opposite of consumption–in order to fill up the (physical and human) capital hole and increase the capacity of the economy.  The tricky part is the segue (and that term implies gracefully) between these two opposite strategies, and recognizing that such a smooth transition (what my boss, Bob Bixby, has referred to as an “exit strategy”) is where we ultimately need to go as we take up the first of the two strategies (the stimulus part).  

And I read more encouraging words in today’s Post.  In another front-page story about the stimulus (now more affectionately known as “recovery”) package, Obama seems to understand that even deficit spending can be done in a fiscally responsible way (emphasis added): 

Top Obama officials say both initiatives are critical to turning the economy around: The spending package seeks to stimulate spending by showering cash on consumers, local governments and businesses. The bailout program, meanwhile, attempts to forestall trouble in the financial system, where risky lending practices helped spark the recession in the first place…

“We can’t just spend our way out of the problem. At some point credit has to flow effectively,” he said. He added that “banks now are fully caught up in a downward spiral where they have now affected the real economy, the real economy is now affecting their balance sheets. And so we’re going to have to intelligently and strategically infuse some additional capital into the financial system.”

So “fiscal responsibility” in the current climate of massive deficits to me means: (i) understanding that tricky transition between the two seemingly-opposite policy strategies for the short run and the longer term, and (ii) keeping the deficit spending in the first stage as sensible and valuable as possible.  So I’d like to see Obama’s “fiscal responsibility summit” focus not just on possible reforms to the entitlement programs for the longer term, but also on “fiscally-responsible deficit spending” in what’s being planned for the first couple years.  That means short-term stimulus spending that despite the deficit-financed cost, has to be done in a way that’s cognizant of the costs, the constraints, and the tradeoffs; attentive to the time horizons over which commitments to those costs and promises of the benefits can be counted on; and given those factors, intent on maximizing (as much as possible) benefits relative to costs over the longer term and not just immediately.  Short-term deficit spending and big deficits are justified, as long as they leave us in a better place (than we otherwise would have been) when we emerge on the other side of this recession.

I’ll try to elaborate on this idea of “fiscally-responsible deficit spending” in the weeks and months to come, and I hope it’s a topic that Obama’s “fiscal responsibility summit” will try to address.