Global financial markets continue to expect the U.S. Federal Reserve to pull a rabbit out of its hat. For example, global stocks rallied on Aug. 31, on the release of minutes from the Fed's Aug. 9 meeting that showed some members of the Fed's Open Market Committee wanted to go beyond the Fed's promise to keep rates exceptionally low through the middle of 2013. Markets read that as a sign that the Fed would do something dramatic if problems deepened.

But as Bullwinkle J. Moose repeatedly said when he pulled a snarling bear instead of a cuddly bunny out of his hat, wrong hat.

Hasn't anybody actually read through to the end of Fed Chairman Ben Bernanke's Aug. 26 Jackson Hole speech? (That's a purely rhetorical question, of course.)

Six paragraphs from the end he said, "Most of the economic policies that support robust economic growth in the long run are outside the province of the central bank." Faster economic growth, Bernanke went on, depends on fiscal policy, and the design of intelligent tax and spending programs. We can't grow our way "out of our fiscal imbalances, but a more productive economy will ease the trade-offs that we face," he said even closer to the end of his speech.

Image: Jim Jubak

Jim Jubak

In other words, we're in deep trouble. After all, we're talking about the United States, a country where President Barack Obama and the speaker of the House have trouble scheduling a major presidential speech on jobs. (That speech is now set for Thursday.)

How dysfunctional is fiscal policy in the United States right now? Let's use the fight over extending funding for transportation as an example. You'd think this would be an easy one.

A fiscal fight over transportation

Transportation legislation, set to expire Sept. 30, provides money to build and repair highways and bridges and to fund mass-transit projects. The expiring legislation also authorizes the government to collect the current gas tax of 18.4 cents a gallon -- which goes into the Highway Trust Fund to pay the federal share of highway projects.

In the Senate, Barbara Boxer, D-Calif., and James Inhofe, R- Okla., have proposed a two-year, $109 billion extension of the act.

In the House, John Mica, R-Fla., has proposed a version of a reauthorization bill that would cut funding by about a third.

Frankly with the unemployment rate at 9.1% and the economy threatening to tip back into recession, I find the idea of cutting spending on transportation puzzling. This is spending that keeps people working and that's one thing the economy needs right now.

If you're so gung-ho about cutting spending right now (and as much as I think we need a deficit-reduction plan in the midterm, I think we need spending to stimulate growth now), there are lots of other places to cut government spending without costing jobs.

Scaling back or eliminating tax breaks to companies would be one place to start. A recent study by the Institute for Policy Studies found that 25 of the 100 highest-paid corporate executives in the United States received more in pay last year than their companies paid in taxes. And how did companies such as Verizon Communications (VZ, news), General Electric (GE, news), Boeing (BA, news) and eBay (EBAY, news) pull that off? By juggling revenue and expenses between the United States and subsidiaries operating in countries that the U.S. Government Accountability Office has characterized as tax havens.

As you'd expect, the political rhetoric in Washington is flying fast and furious. Democrats say the House transportation bill would cost 500,000 highway jobs and 100,000 additional transit jobs. Republicans say the Senate bill is yet another instance of runaway spending. I think the Democrats have the better of this argument: The experience of the Great Depression says that when the problem with the economy is a slump in demand, then government spending that creates demand is an effective tool of fiscal policy.

But what drives me nuts about this debate isn't the differences between the Democratic and Republican plans but their similarities. The vision of both sides is so crabbed, so pessimistic, so limited that it's hard to see any hope for fiscal policy leading the country out of recession in the way that Bernanke pleaded for in his Jackson Hole speech.

Why not increase the gas tax?

Take the federal gasoline tax. The 18.4-cents-a-gallon tax hasn't been raised since 1993. In September 1993, regular gasoline sold for $1.05 a gallon, so the federal tax represented 17.5% of the price of a gallon. In August 2011, regular sold for $3.60 a gallon, so the tax represented just 5.1% of the price of a gallon.

Despite this, despite projections that show the Highway Trust Fund facing insolvency in 2012, despite strong arguments (agree or disagree, up to you) that gradually raising the price of a gallon of gas through taxes would be one way to reduce U.S. dependence on oil -- despite all this -- both Obama and congressional Republicans have ruled out any increase in the federal gas tax.

The vague plan is to make up the shortfall in the trust fund by attracting more private-sector funding. (Of course, if the government has to give away subsidies to attract this private funding, it wouldn't count as a tax. Although it would be spending that adds to the deficit.)