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The debate Washington ought to be having, but isn't

In general, for much of the fall, there have been plenty of encouraging signs of a growing economic recovery.

In general, for much of the fall, there have been plenty of encouraging signs of a growing economic recovery. Economic growth, job creation, consumer confidence, housing, and auto sales have all pointed in the right direction, raising hopes of a more robust 2013.

But as the year draws to a close, the skies are not without storm clouds. The latest ISM manufacturing figures were released this morning, and they were not encouraging. What's more, Neil Irwin reports that GDP figures for the 4th quarter keep getting revised in the wrong direction.

The bottom is falling out of economic forecasters' expectations for U.S. economic growth in the final months of 2012. And if some of the more bearish estimates prove accurate, it will be the weakest rate of growth since the start of 2011.Macroeconomic Advisers had been projecting a 1.4 percent annual rate of GDP growth in the fourth quarter. On Friday it revised that estimate down to 1.1 percent Friday morning–and then again to 0.8 percent Friday afternoon. J.P. Morgan slashed its number to 1.5 percent from 2 percent. Tom Porcelli of RBC cut his estimate all the way from 1 percent to 0.2 percent.

There are a variety of factors contributing this, including the effects of Hurricane Sandy, but the consensus seems to be that the U.S. economy will enter the new year limping along.

And that leads to a larger political question that's gone largely overlooked: are policymakers in Washington stuck in the wrong conversation?

Fiscal talks are, of course, very much on the minds of the political world, as Congress and the White House debate how best to tackle debt reduction. But the nature of the debate is focused around austerity measures of one form or another, in order to prevent more sweeping austerity measures from kicking in automatically at the end of the month.

And the point of an austerity agenda is to take capital out of the economy, deprioritize growth, and focus on deficits. Is it too late to suggest policymakers forget about debt reduction and start taking economic growth seriously again?

There is some precedent for this. Two years ago at this time, Republican lawmakers said they feared a debt crisis, but in reality, their principal concern was over extending Bush-era tax rates. Eventually, GOP leaders struck a deal with the Obama White House -- Republicans would ignore the deficit to get what they wanted (extended tax breaks) and in exchange, Democrats could ignore the deficit to get what they wanted (a payroll tax break and extended unemployment benefits). Collectively, both sides agreed that reducing the deficit just wasn't especially important.

And two years later, it's still not. The United States can still borrow easily; interest rates are low; and inflation is practically non-existent. By some measures, foreign investors will pay us to borrow their money, which Washington can then invest in job creation.

To his credit, President Obama's first official bid in the fiscal talks included the right priorities -- jobless aid, infrastructure spending, etc. -- but his plan was still a debt-reduction offer, which made it a progressive approach to a conservative goal.

It's not exactly on the table, but there's no reason we couldn't see a resolution to the current standoff that's similar to the one we saw two years ago. I'm certainly not privy to the behind-the-scenes negotiations, but I wonder what would happen if congressional Republicans offered Democrats meaningful economic stimulus to boost growth and create jobs, in exchange for another extension of Bush-era tax rates and a promise to get around to austerity measures at some point down the road?