Despite the hoopla over last week’s jobs numbers and Tuesday’s long-term fiscal outlook from the Congressional Budget Office, the underlying reality of the U.S. economy hasn’t changed all that much lately. We are still in the midst of the hard slog following the financial crisis, and we still face a massive long-term government budget deficit.

Let’s hope that dismal combination is all we face -- because things might be about to get much worse. Europe stands on the brink of economic disaster, which at its worst could easily trigger another outright recession in America. Foreign deposits in Spanish banks amount to about 500 billion euros ($622 billion). It isn’t difficult to imagine those depositors changing their minds about such an asset allocation. That could prompt deposit flight in other southern-tier banking systems, which the European authorities couldn’t contain.

The U.S. desperately needs more fiscal insurance against such a shockwave.

The right policy, which also happens to be the only one with any hope of being adopted in the foreseeable future, is a barbell approach, with more stimulus on one side and, on the other, more deficit reduction enacted now to take effect over time. That would attack both the weak labor market revealed in last week’s jobs report and the long-term fiscal gap that the CBO highlighted on Tuesday. If we could enact such a dual plan immediately -- which is admittedly hard to see happening, even though it has been embraced by some Republicans -- it would give us much-needed credibility in our efforts to urge the Europeans to act on their own problems before it’s too late.

Stimulus Needed

Some recent proposals for the U.S. economy correctly note that current conditions, with the 10-year Treasury yield hovering around 1.5 percent and unemployment stuck at more than 8 percent, call for significant additional stimulus. But these stimulus-only proposals, by not lifting the other side of the barbell, are incomplete for three reasons:

First, substantial stimulus-only proposals have no chance of being enacted. Second, even if they could be, they would accelerate the date at which we again run up against the debt limit -- and their proponents have no strategy for dealing with that impediment. Finally, even if the debt limit were simply assumed away (an ivory-tower approach that might prove appealing to some stimulus-only proponents), the impact of any stimulus would be stronger, and our international credibility enhanced, if it were combined with specific, but delayed, actions to reduce the deficit.

The jobs report and the new CBO analysis highlight a typical pattern that occurs after a financial crisis: Recovery tends to be sluggish, and debt usually builds up quickly. In December 2007, the CBO projected that debt held by the public under current policies would rise from 36 percent of gross domestic product in 2007 to 37 percent this year and 73 percent by 2025. Instead, debt has already risen to 73 percent this year -- and that’s good, because the automatic stabilizers and stimulus measures behind the increase have helped to cushion the blow from the aftermath of the financial crisis.

In the report issued Tuesday, the CBO projects that under current policies the higher debt will remain with us even after the economy has recovered. And by 2025, our federal debt is forecast to hit 106 percent.

The biggest reason that the CBO has boosted its 2025 debt projection from less than 75 percent of GDP in the 2007 projections to more than 100 percent now is the lingering effects of the debt increase associated with the recent recession.

Risky Assumption

Those CBO projections should also suggest at least some caution about recent analyses that increased deficit spending during a severe economic decline will have no effect on the long-term ratio of debt to GDP -- and might even reduce it. Under unusual conditions, stimulus after a recession could indeed theoretically pay for itself -- a type of Laffer curve of the left. When interest rates are very low, the extra debt doesn’t cost very much. And to the extent that the stimulus boosts the economy for a prolonged period, the debt-to-GDP ratio may even fall.

Under the CBO’s economic assumptions, however, the Laffer curve of the left seems to have as much empirical relevance as the original Laffer curve suggesting tax cuts actually raise revenue. A barbell approach also provides a form of insurance against the new Laffer curve being wrong.

The stimulus-only proponents have one thing very right: The economy needs more support today. And if Europe goes over the cliff, that need will become more urgent.

Still, a barbell approach is much better. It is more likely to be enacted; it offers a pathway to lifting, rather than being impeded by, the debt limit; it doesn’t gamble on the possibility of a stimulus paying for itself; and it would generate just as much, if not more, growth today than a stimulus-only approach of equal size. Let’s go for the combo deal.

(Peter Orszag is vice chairman of global banking at Citigroup Inc. and a former director of the Office of Management and Budget in the Obama administration. The opinions expressed are his own.)

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To contact the writer of this article: Peter Orszag at orszagbloomberg@gmail.com

To contact the editor responsible for this article: Mary Duenwald at mduenwald@bloomberg.net