Washington has kicked off a perfectly predictable donnybrook over stimulus. Democrats, who spent the past eight years bashing George Bush for turning a Clinton-era surplus into a big deficit, are now defending what will be nearly  $1 trillion in new tax cuts and spending. Republicans, who presided over decades of deficits, suddenly are worried about the debt we are leaving to our grandchildren.

Yet, this entire squabble may be missing the point. If Washington is going to help dig the economy out of its very deep hole, it must do more than just stimulate demand. It must also restore the health of the credit markets.

That is not to say that designing a good stimulus bill is not important. It is. But we need to recognize the limits of what all this government spending and tax cutting can do.

For now, Washington is falling back on recipes that have been tried many times before with only limited success. On the tax side, proposals such as allowing businesses to write-off capital costs more quickly, or giving cash payments to workers, have been tried repeatedly in past recessions. As a new TPC report card shows, there are no magic bullets here. While some pieces of the tax stimulus working its way through Congress will be better than others at jump-starting the economy, none will have a major impact.

The same goes for spending. A new CBO report concludes it will take years for the proposed new outlays to work through the economy. For instance, CBO figures only about one-third of $30 billion in proposed highway money could be spent within the next 20 months.

My sense is that, at best, the stimulus package will keep things from getting worse. Necessary, as they say, but not sufficient for recovery. The IMF recently published an interesting paper that noted the importance of both stimulus and credit market reform, even as it called for massive efforts to boost demand. Christy Romer, a key adviser to President Obama and a highly respected economic historian, has argued that New Deal fiscal policy did almost nothing to end the Great Depression.   

Think of stimulus as a life preserver. It may keep the economy from drowning, but won’t do much to get us back on a course of sustained economic growth.

It will be up to the Fed and the much-maligned TARP (and its costly progeny) to accomplish that. The problem, of course, is that when it comes to fixing the credit markets, we are sailing in unchartered waters. Do we create a “bad bank” that will offload toxic loans from troubled financial institutions?  Do we nationalize some brand-name banks? In desperation, we find ourselves looking to the experiences of Sweden or Japan for answers that are not obvious.

After a lot of arguing, we’ll enact a nearly $1 trillion stimulus. It will help, though much of the money will inevitably be wasted. But keep your eyes on what the Fed and the Obama Administration do to get the credit markets working again. That, more than tax cuts and spending, will be key to how quickly the economy gets back on track.