How to stop the slide into steep recession

ALL THE economic signs point to a deep and prolonged recession - unless Congress and the new administration act promptly and boldly.

Some of what's needed is genuinely difficult to accomplish. How to recapitalize and re-regulate the financial system? How to unscramble the mess of securitized mortgages to prevent a worse epidemic of home foreclosures? How to save the auto industry? All this, and more, will fall to the new administration.

But one important policy tool can be done immediately: spending large sums of federal money to offset collapsing demand from households, businesses, and state and local governments.

Retail sales in October suffered their worst one-month slide since statistics have been kept. Households, according to economist Alan Sinai, have suffered a loss of $7 trillion of asset-wealth, reflecting declining housing values and plummeting stock prices. Unemployment is heading toward double digits, and is already there if you count people involuntarily working part time. And state and local governments, facing declining tax receipts, are ordering steep budget cuts, layoffs, and deferrals of public projects.

New York Governor David Paterson just announced $5.2 billion in budget cuts, to fall heavily on education and health. California faces a $17 billion shortfall. Unlike the federal government, states, cities, and towns may not run deficits. So they are forced to make cuts at the worst time in the economic cycle.

These cuts then supercharge a classic downward spiral. Smith loses his job, and spends less money at the store. Then Jones loses his job. Add to that a severely traumatized banking sector, and you have all the fuel for a depression.

Three weeks ago, House Speaker Nancy Pelosi announced plans to call the lame-duck Congress back into emergency session to enact a spending program in the range of $250 billion to $300 billion. Most of that money would go to relief for state and local governments, extended unemployment insurance, and emergency public works.

This makes great sense, and is only the down payment on the federal outlay that will be needed in 2009 for even larger-scale infrastructure spending.

Creating new jobs can be tricky. But making sure that hard-pressed state and local governments don't lay off a single worker or cut a single benefit in a recession is easy. All it takes is emergency revenue sharing, an idea first proposed by that radical Richard Nixon.

In addition to local governments, nonprofit agencies providing services to the needy are taking a double hit. Service agencies get some government funds, which are now being cut, but are also heavily dependent on charitable donations. Foundation endowments are suffering the effects of the stock market slide, and personal giving is declining.

Congress is back in session this week. But the quick stimulus bill has gotten all tangled up with the question of aid to the automakers. The Bush administration has equivocated on whether to authorize $25 billion of bank-bailout money for aid to Detroit, but is opposed to other stimulus spending. Maybe it wants a full-blown depression first?

There are also the usual Cassandras warning about increased deficit spending. But compared with the risk of a depression, temporary increases in the deficit are surely the lesser evil.

Inflation is hardly a worry. Investors are perfectly willing to lend the Treasury money for 30 years, at 4 percent interest. If inflation was a concern, the government would be having to pay a much higher rate.

You can imagine life in the office of a congressional Republican. The ideological purists are on one phone line warning about the evils of government spending, while mayors, governors, and small businesses are on other lines pleading for relief.

A temporary stimulus will just buy some time until the new president takes office, when even more federal aid will be needed. But the House and Senate leadership should damn the torpedoes, vote for an adequate emergency stimulus, and dare Bush and the GOP legislators to oppose it.

Robert Kuttner is co-editor of The American Prospect magazine and author of "Obama's Challenge: America's Economic Challenge and the Power of a Transformative President."