The Washington policy debates of the last week would almost make a casual observer believe that the nation's political leadership is in fact nostalgic for the good old days of the Great Depression when the country suffered double-digit unemployment for a decade.

The two big news items last week were a batch of absolutely horrible economic reports and the release of President Barack Obama's budget. The media almost completely ignored the former and focused its attention primarily on the latter. So, let's start with the bad news.

As can be expected, much of the bad news centred on housing. The National Association of Realtors reported that existing home sales fell below 4.5 million for the first time since the mid-90s. They also reported that the median house price dropped another $5,400 in January or 3.1%.

Since July, this series shows a drop in the median home price of 18.9%. Other data also showed house prices in a free fall, most notable the commerce department's series on new home sales, which showed a drop of 10% in the median price between December and January. With vacant housing units at record levels, and many potential home buyers no longer having the equity in their current homes for a down payment, it is difficult to see how this free fall stops any time soon.

Housing isn't the only sector that's plummeting. Investment fell at a 28% rate in the fourth quarter, the sharpest rate of decline in more than 50 years. New orders have fallen more than 5% in each of the last two months.

Along with the collapse of these sectors, the number of new unemployment claims just keeps rising. Last week, it was 667,000 new claims. February may show more than 700,000 jobs lost for the month in the report released on Friday. The unemployment rate is likely to hit 8% for the month, and it could well be over 9% by the summer.

While this bad news was flowing, President Obama released the first budget of his presidency. It is an ambitious document. The proposal calls for directly confronting powerful interest groups in order to eliminate important sources of waste in the budget. For example, the budget eliminates subsidies to private insurers in Medicare and drug companies in Medicaid. The saving will go toward financing healthcare reform.

He also proposes to eliminate the fund managers' tax break that allowed managers of hedge and equity funds (some of the richest people in the country) to pay tax at just a 15% rate. Obama proposes to have these Wall Street tycoons subject to the same tax rates as everyone else.

There are many other areas where the budget turns to long-neglected areas, most importantly a proposal to establish a cap and trade system to provide incentives to reduce greenhouse gas emissions. It is not clear that Obama can accomplish the full agenda laid out in his budget, but there is no doubt that he hopes to accomplish a great deal in his term in office.

Remarkably, much of the discussion of the budget did not focus on Obama's agenda, but rather his deficit targets. In particular, many commentators questioned whether he would reach his deficit target for 2012 because the economy might be weaker than his budget assumes.

The pundits' concern on this point should have caused people to throw their television sets, radios and newspapers out the window. Let's suppose that the pundits are correct and the economy sinks farther and later grows more slowly than the Obama administration assumed in planning its budget.

Would the pundits have Obama therefore cut more spending and raise more taxes? This would be close to crazy. With the economy plummeting, the first priority of the administration and Congress must be to boost the economy.

If the unemployment rate is 12% when Obama's first term ends, he can forget about getting re-elected, even if the budget is balanced. On the other hand, if he has managed to bring the unemployment rate down to a reasonable level, no one other than a few Washington pundits will be bothered by the deficit that might have been necessary to achieve this result.

The electorate is well ahead of the punditry on this issue. The federal government is the only force capable of turning the economy around in the near future and sustaining growth. The public recognises this fact and will demand good economic policy even as the punditry continue to push policies that would throw the economy into another depression. Even if they have very large megaphones, the punditry are thankfully still a very small minority and unlikely to get their dream.