Come January 20, there will be a new occupant in the White House. The next president will face some of the same challenges that confronted Bill Clinton when he assumed office 16 years earlier, including a weak economy and a large deficit. Even the overly optimistic Bush administration predicts a deficit of $410 billion for the fiscal year ending September 30, more than the peak Bush I deficit of $290 billion.

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Like President Clinton, the incoming president will be pressured to placate Wall Street by bringing the deficit down quickly. Wall Street has a mortal fear of deficits, either as a harbinger of inflation—which drives interest rates up and bond prices down—or tax increases.

There are some critical differences between then and now that should dissuade our next chief executive from following the Clinton playbook. This is no time to return to Rubinomics, the single-minded focus on deficit reduction that was the hallmark of the Clinton years. Such an approach most likely wouldn’t work, and it wouldn’t stand up to America’s pressing needs.

With the national debt $3.5 trillion higher than when Clinton took office (while its ratio to the gross domestic product has risen from 60 to 67 percent), the need to focus again on deficit reduction might seem even greater than before. Financial markets will no doubt demand fiscal prudence above all else. But deficits by themselves do not determine a nation’s wealth or health. If a country borrows to finance a consumption binge—or a failed war—it will be worse off. But borrowing to finance high-return research and development or infrastructure improvements will raise incomes by more than enough to offset the increased interest payments.

When the economy is in a recession or operating below its potential, well-designed deficit spending can act as a stimulant. This was the basic lesson taught by John Maynard Keynes. Deficit spending on productive public investments can increase incomes while cultivating long-term growth.

Obsessing over the deficit while the economy is in or near a recession would be disastrous (as Argentina, Brazil, Indonesia, South Korea, and Thailand have learned). It would be dangerous for the next administration to blindly follow the Wall Street-pleasing Clinton recipe in hopes of replicating the ’90s boom. That decade was an anomaly.

When Clinton took office, banks were sitting on large quantities of long-term government bonds, partly the result of a misguided quirk in regulations and some subtle flaws in accounting standards. Regulators treated these long-term bonds as if they were safe, although their value was vulnerable to rising interest rates. And because these bonds were treated as safe, banks didn’t need as much capital—a particular concern because reckless lending in earlier years had eroded their capital base. Moreover, they could book the difference between the long- and short-term interest rate as profit, without setting aside reserves for a potential decrease in the value of the bonds—even though the discrepancy between those rates arose because markets were worried about precisely such a decline in value.

Tackling the deficit seemed to lead to reductions in long-term interest rates partly because it brought down inflationary expectations. And large reductions in long-term interest rates fed increases in bond prices, which helped to recapitalize America’s banking system after another of its episodes of bad lending practices.

The situation is totally different now. Long-term rates are already low, and banks are piled high with subprime mortgages and complex instruments.

Deficit reduction may have had less to do with the 1993 recovery than is widely believed. In fact, that belief may be a case of post hoc, ergo propter hoc—the fallacy of assuming that when one thing occurs after another, the first event caused the second one. America was lucky. Excess global capacity in Asia led to falling prices for many imported consumer goods, reducing inflationary pressures. And this, far more than deficit reduction, led to lower interest rates. Today, the weak dollar and inflationary pressures in Asia mean that long-term interest rates are unlikely to fall, with or without deficit reduction.

Like it or not, restoring America’s short-run economic health will require spending. For instance, 2 million Americans are on course to lose their homes in the next year, which will further depress housing prices and lead to another wave of foreclosures. Weaknesses in the banking system will result in tightening credit, with cascading effects for the entire financial system and economy.

Some of what needs to be done does not require money. To stem the tide of foreclosures, we need a homeowners’ Chapter 11: a speedy restructuring of liabilities for poorer owners, modeled on relief for corporations that cannot meet their debt obligations. No one gains when owners are forced out of their homes; a house could be appraised and the owner’s debt written down. But to protect entire neighborhoods from blight, the government may need to buy some foreclosed properties. And it would be a crime to sacrifice such sorely needed assistance on the altar of fiscal prudence.

Beyond short-term difficulties, America’s economy is suffering from a longer-term underinvestment in infrastructure, and we’re losing our innovative edge in the global economy. So what’s this administration’s prescription? Tax rebates! Does it really make sense to encourage consumption in an economy with a zero savings rate? What we really need is more public spending on infrastructure, R&D, and education.

Wall Street’s insistence on deficit reduction is shortsighted. Ten years ago, the International Monetary Fund required deficit-reduction policies to ensure that American and European creditors would be repaid, even knowing that such policies would plunge East Asia into recession. The result was a contraction of Asian economies and a massive wave of defaults. And the lenders were never repaid.

Such a disaster could unfold today. If deficit hawks get their way, we risk making our economic contraction worse—and making the deficit larger than it would be if we did the right thing.

Joseph E. Stiglitz, a Nobel laureate in economics, is co-author of The Three Trillion Dollar War: The True Cost of the Iraq Conflict.