Sinking Economy Shakes Denial

Today's news that the economy is sinking further into recession [1]—gross domestic product growth decreased [2] at an annual rate of 0.3 percent in the third quarter—is making it clearer that there is only one correct response to the current economic crisis: A robust government spending program to produce jobs and get money directly into the hands of ordinary Americans.

"Today’s GDP numbers are further evidence that our economy is going in the wrong direction, and provides a sad epitaph for this Administration's failed economic policies" said Sen. Charles Schumer, D-N.Y., who is presiding over a hearing [3] today by the Joint Economic Hearing on the latest economic data. "There can no longer be any debate that we are in a recession, and that we need to create a targeted stimulus program to prime our economic pump, and help American families as they weather this storm.”

Even one of Sen. John McCain's advisors is conceding that today in an op-ed [4] in The Washington Post. Economist Martin Feldstein made the basic case for the kind of stimulus proposal being pushed by labor and progressive organizations.

The only way to prevent a deepening recession will be a temporary program of increased government spending. ... [W]hile past recessions lasted an average of only about 12 months, this downturn is likely to last much longer, providing the scope for successful countercyclical spending.

A fiscal package of $100 billion is not likely to be large enough to revive the economy. The fall in household wealth resulting from the collapse of the stock market and the decline of home prices may cut aggregate spending by $300 billion a year or more.

The president-elect should focus on developing a mechanism for identifying and funding spending initiatives that can occur quickly and that would otherwise not be done. While it would be good if some of the increased spending also contributed to long-term productivity, the key is to stimulate demand.

Feldstein made a gratuitous slap at Sen. Barack Obama's tax proposals (which would increase taxes on people making more than $250,000 a year and restore corporate tax levels to what they were before the 2003 Bush tax cuts, but would also specifically target tax breaks to companies that increase their domestic hiring).

But the evidence of a now-shrinking economy (including today's weekly unemployment claims report [5] that said an average of 475,000 people a week have been filing unemployment claims in the past month) has clearly made it more difficult to argue against using the federal government as a countercyclical force against the coming tide of unemployment and declining consumer spending.

There is a strengthening consensus that the response has to be at least $300 billion a year, with a large portion of that going into infrastructure projects, direct aid to state governments, and into programs that will help homeowners and unemployed workers get through the current crisis.

The only outstanding question is whether the senator who is elected president on Tuesday will walk into a lame-duck session of Congress, eat the words of his campaign, and propose a solution that actually matches the scale of the problem. The answer to that question may depend on what we as activists do immediately after the election to give the president-elect and Congress political backbone.