It has become the most important political story of the year – the battle between the New Hoovers who demand austerity, and the rest of the world that understands we need prosperity instead of prolonged recession. So far the Obama Administration has been hard to pin down on this. They pushed hard to get the $787 billion stimulus done in early 2009, but made the stimulus too small to pull the nation out of recession for fear of asking for too much.

Since then, calls for austerity have grown louder. Some of this comes from wealthy folks like Pete Peterson spending a ton of money to push this messaging out to the public. Some comes from Austerity Democrats who do not understand how economies actually work. And some comes from the teabaggers, who as I explained are afraid deficit spending will undermine their privileges by being spent on nonwhite and poor people.

California has been suffering from the flaws of austerity since the summer of 2007. Budget cuts have merely worsened the recession and worsened the budget crisis, not solved it. Yet it would have been worse had the White House not won the stimulus battle last year.

However, it was beginning to appear that Obama was starting to listen to the siren song of the deficit hawks, and drive the halting recovery into a ditch by repeating FDR’s 1937 mistake and withdrawing stimulus.

As Calitics alum David Dayen reports, the White House just might understand the risks of New Hooverism. In a letter Obama wrote to Congressional leaders, he lays out a clear case against Hooverism and for $50 billion in new stimulus:

In the long, four-page letter, Obama says that “we are at a critical juncture in our nation’s path to economic recovery,” and that more support must be given to the economy in upcoming bills before Congress. Specifically, Obama wants Congress to pass a $6-8 billion measure to extend the 65% subsidy for COBRA eligibles, so jobless Americans can keep the health insurance provided by their former employer. He wants $23 billion in FMAP funding to go to the states so they don’t have to cut back on their Medicaid rolls. Both of these measures were cut from the tax extenders/jobs package in the House, a concession to Blue Dogs nervous about short-term deficits.

In addition, Obama calls on Congressional leaders to include $25 billion for state education and public safety jobs for state and local governments in the war supplemental….

the Administration at least recognizes the need for action. He notes that allowing hundreds of thousands more layoffs just adds more costs in automatic stabilizers like unemployment and job training, as well as lowered demand for goods that can no longer be afforded, and lower tax revenue as jobs vanish. “That is why the actual cost of saving state and local jobs is likely to be 20 to 40 percent below their budgetary cost,” Obama writes.

It’s a welcome sign that the White House understands the reasons why austerity now would be an unusually bad idea, and seems to confirm that Tim Geithner’s statements at a recent G20 meeting that global austerity would be extremely reckless were a sincere representation of the White House’s position, and not just a desire to have other countries stimulate to give the US room to cut here at home.

But even if Obama is successful in Congress, the effects of new stimulus would be weakened here if austerity is once again employed here in California. Obama’s letter should give powerful new momentum and clear, popular messaging to Sacramento Democrats this summer. Arnold Schwarzenegger and the Republicans are demanding more austerity, despite the growing pile of evidence showing that the three years of austerity we’ve already had are merely worsening our economic and fiscal situation.

And of course, it’s also worth pointing out that Meg Whitman would embrace austerity, planning to make it permanent through a spending cap and intending to increase the unemployment rate by firing 40,000 public workers. Carly Fiorina, for her part, has a long track record of destroying jobs, nearly destroying HP in the process.

Californians still support President Obama and his agenda. That should give a further boost to Democrats here as they beat back the New Hoovers in the California Republican Party.