Nearly three years since the onset of the financial crisis, the continued weakness of the labor and real estate markets, U.S. consumers' unbalanced balance sheets and fading support from policy stimulus have transformed the risk of a double-dip recession from unlikely to about a 40 percent likelihood. The government responded creatively and massively to the near collapse of the U.S. financial system: The Troubled Assets Relief Program, stimulus spending and near-zero interest rates for nearly two years prevented a second Great Depression.

But the Federal Reserve has little ammunition left to boost growth or fend off a slump. And the federal deficit has reached such levels that additional spending of the kind that helped kindle the mini-recovery of early 2010 looks unwise.

In the midst of an election with crucial implications for its ability to govern, can the Obama administration reduce the likelihood of a "double dip"?

The administration knows that it needs to fashion a revenue-neutral fiscal stimulus that increases labor demand and consumption. Its proposal to make permanent a research and development tax credit that dates to the 1980s, and then to enact a temporary investment tax credit allowing firms to write down capital investments at 100 percent of cost, are welcome -- but too modest a cure for what ails the economy.

A much better option is for the administration to reduce the payroll tax for two years. The reduced labor costs would lead employers to hire more; for employees, the increased take-home pay would boost much-needed economic consumption and advance the still-crucial process of deleveraging households (paying down credit card debt and other legacies of the easy-credit years).

Most policy approaches, including the Obama proposals, have tended to subsidize the demand for capital rather than the demand for labor. That has the problem backward. In the second quarter, capital spending reached an annual growth rate of 25 percent. The argument that increased demand for capital leads to greater demand for labor (i.e., if you buy more machines you need workers to run them) has not held up. Firms are investing in capital goods, equipment and offshore offices that allow them to produce the same amount of goods with less -- and lower labor costs. To avoid a chronic increase in the unemployment rate, we need to subsidize the demand for labor -- achieving job creation -- rather than making it cheaper to buy capital, as investment and other tax credits would do.

President Obama could fully fund the reduction in payroll tax by allowing the Bush tax cuts for people making more than $250,000 a year to expire. Meanwhile, the Bush-era cuts affecting middle- and low-income earners -- the vast majority of Americans -- would remain in place for the time being.

After two years, when U.S. growth is more robust and the pace of private-sector hiring has picked up, we can afford to phase out the payroll tax cut while maintaining the income tax rates for the rich. It's possible also that we could increase the tax burden on the middle class over time to reduce our budget deficit.

Proportion is critical in designing the payroll tax cuts. Small and medium-size enterprises have had it rough the past three years. They are scrambling for operating capital as banks hold reserves tightly, and they face higher borrowing costs than large corporations when they do find willing lenders. To maximize the incentives for private-sector hiring, there should be sharper reductions to the payroll taxes paid by employers than for those paid by employees. This will counter the argument that the higher income taxes funding these payroll tax cuts will hurt the wealthy and small businesses (many of which are run by those same high-income individuals) and their willingness to hire. Moreover, any cut in the payroll tax reduces the costs of operation and labor for all businesses. Other targeted policies that induce smaller banks to lend to small and medium-size businesses may be needed.

Low-income workers have historically shown a much higher propensity to consume when given extra money, so the payroll tax cut should be designed to provide a larger-percentage break to those on the low end of the income scale compared with the upper middle class.

Payroll tax cuts for the majority of low- and middle-income Americans could be just the beginning. The administration could propose even deeper cuts in payroll taxes if the president could get Congress to accede to a partial expiration of the other 2001 and 2003 tax cuts. At the end of this year, marginal cuts in capital gains, dividends and estate taxes are all up for renewal. A partial expiration of those special reductions -- more likely to hit higher-income individuals -- would not have to raise rates to the levels that preceded the Bush tax cuts; it could also incentivize those companies that have built up huge cash reserves (in effect, overinvesting in capital at the expense of hiring) to increase their demand for labor.

These temporary changes could not realistically be promoted as deficit-reduction measures. But they would hold the line against additional government debt while the nation awaits the recommendations of the president's bipartisan panel on deficit reduction. Absent a new stimulus package -- which appears highly unlikely at this point -- these cuts direct billions in cash back into precisely those American households most likely to spend it and those businesses most likely to apply it to hiring. A tiny percentage of the highest-income Americans will pay more for the service the government rendered to their brokerage firms and investment banks in 2008. In exchange, a large tax break can be fashioned for employers and employees that jump-starts consumption, encourages hiring and thereby reduces the risk of a double dip without busting the budget.

Nouriel Roubini, chairman of Roubini Global Economics and a professor at New York University's Stern School of Business, is the author of "Crisis Economics: A Crash Course in the Future of Finance."