By the time you read this column, the 2010 midterm elections will have passed. If the predictions of political commentators and polling outfits bear fruit, the results will be what you now know: an overwhelming vote for Republican candidates and a repudiation of Democratic legislative victories.

Hence, we can expect efforts when the 112th Congress gets underway in January to “repeal and replace” the health care and Wall Street reform acts. And we should expect no more talk of fiscal stimulus plans–at least not of the size of the $787 billion American Recovery and Reinvestment Act of 2009–as federal, state and local governments seek to reign in burgeoning budget deficits.

The Case for Spending

One can debate the merits of the first two laws. But in respect to fiscal stimulus, the case is clear: We need more of it–much more–to lift people, millions of people, out of unemployment, put the economy on a sustained path to recovery and, yes, boost business prospects for your own life insurance and financial services practices.

But don’t take my word for it. The need for government intervention during economic downturns and (as now) weak recoveries have long been touted by experts since John Maynard Keynes, a British economist, first advocated using fiscal tools to counteract the adverse effects of recessions and depressions.

Keynes argued, that “aggregate demand”– the sum of consumer spending, investment and government expenditures–determines the level of economic activity. When the first two are at depressed levels during recessions, then government spending (particularly in the form of public works projects) is needed to restore an economy to full employment.

This lesson of Keynesian economics seems to have fallen on deaf ears of late.

Getting it Right

Policymakers need to reconsider. That much was made plain during a media forum hosted in midtown Manhattan on October 21 by the American Academy of Arts & Sciences. The event’s featured speakers, Benjamin Friedman and Robert Solow, made a powerful case for government intervention in the current anemic economy.

Solow, an institute professor emeritus at the Massachusetts Institute of Technology, Cambridge, Mass., said the U.S. can quickly generate employment for many of the nation’s 16 million idled workers by re-launching state and local government programs that got axed during the downturn. The federal government, he added, should also be funding long-term investments, most especially projects to repair or upgrade the nation’s aging infrastructure.

Friedman, a William Joseph Maier professor of political economy at Harvard University, Cambridge, Mass., and the event moderator, New York Times reporter Louis Uchitelle, agreed, noting also that such public sector investments generate private sector employment and pay for themselves.

Indeed, the speakers noted, the U.S. continues to rely on many federal works projects launched during the New Deal under the Works Project Administration, Tennessee Valley Authority, the Civilian Conservation Corp., and other federal agencies. Given this rich legacy, Friedman said, he was troubled that “we seem to be nationally devoid of ambition and averse to undertaking anything we would be proud of years later.”

To be sure, America’s current economic woes can not only be pinned to inadequate federal spending. As the speakers pointed out, policies predating the downturn have also been responsible. Among them: long-standing tax incentives that, by favoring home ownership over renting, have aggravated the geographic and occupational immobility of an aging workforce.

The Great Recession would also not have been so severe, the speakers observed, if regulatory controls were in place that could have prevented a cyclical housing bust from metastasizing into a near-cataclysmic financial meltdown that wiped out an estimated $16 trillion in wealth.

Key Takeaway

Sound fiscal policy, not financial bets, is what the U.S. economy urgently needs now to restore jobs and brighten prospects for businesses like yours. The naysayers who argue against increased government spending because of supposedly out-of-control red ink fail to note that government debt in times of low inflation, low interest rates and low private investments–all conditions we now have–is eminently manageable.

What America suffers from are not budget deficits, but a deficit of imagination.