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BUBBLE ECONOMICS….Does the economy need a $600 billion stimulus? Think bigger:

A number of economists, including former advisers to Republican presidential candidate John McCain, have suggested to Obama’s team that the economy needs a much bigger cash infusion, possibly up to a $1 trillion over two years.

….Obama’s economic team believes that to put unemployment on a downward trajectory with a goal of 7.5 percent or less over two years would require a stimulus package of about $850 billion. That would generate about 3.2 million jobs by the first quarter of 2011.

….Among those whose opinions Obama advisers sought were Lawrence B. Lindsey, a top economic adviser to President George W. Bush during his first term, and Harvard professor Martin Feldstein, an informal McCain adviser and former chairman of the Council of Economic Advisors under President Ronald Reagan.

Over at RBC, Jonathan Zasloff poses a few good questions about how to spend this dough. On this very narrow issue, I think my first question would be, how much of this program should be spending and how much should be tax cuts? Can we really spend this much money quickly even if we want to? Would a payroll tax holiday make sense as part of this package?

More broadly — and I know I’m being a bit Chicken Little-ish here — I continue to wonder if a massive stimulus package that spurs domestic consumption means that just as we propped up the economy in 2002 by replacing the dotcom bubble with a housing bubble, we’re now propping up the economy in 2008 by replacing the housing bubble with continuing support for our ever-ballooning trade deficit bubble. See Tim Duy for more on this. I don’t know if he’s right, but I don’t feel too bad for bringing this up since no one else really seems to know either.

In any case, I do know that pretty much every economist in the country agrees, in general, that eventually U.S. consumption has to go down, savings have to go up, and we have to start exporting more than we import. It’s just a question of whether we can afford to worry about that with the economy collapsing around our heads. Still, here’s a thought: if this is a serious long-term concern, shouldn’t we at least try to construct a stimulus package that stimulates export industries more than other sectors of the economy? If so, how would we go about doing that? And what else should we be doing to prepare for the day when the current panic subsides, the great T-bill bubble bursts, and the rest of the world decides that 0% yields on treasuries suck and they don’t want to buy any more of them? And what they’d really like instead are some tangible goods and services, thankyouverymuch?

I don’t know. Maybe we really can’t worry too much about this at the moment. But the trade deficit bubble is going to pop eventually just like the dotcom bubble and the housing bubble. We at least ought to be thinking about this a little bit.

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