The Next Fight

Hey, "my friends," about the economy? "How about a little straight talk?"

All that palaver about cutting spending, balancing the budget? Ruinous. Can't happen. We're going to have to borrow and spend a boatload of money to get this economy going.

And tax cuts? That won't do it; we have to rebuild America. Getting this done is the next big fight that the next president will face.

You won't hear that from Sen. John McCain Nor is it conventional wisdom. Tom Brokaw and other commentators demand that the candidates choose "priorities," or pledge to curb entitlements to get deficits under control. The Wall Street-funded billion dollar Peter Peterson Institute does full-page ads on the need to balance the federal budget immediately. McCain vows to make the federal government "live within its budget just like you have to." He'll "impose a one-year spending freeze on every agency of the federal government " (except the Pentagon and veterans). "To make our economy strong again, we must reduce the burden of federal spending," he says. His new stimulus plan for the economy is virtually all tax cuts, such as capital gains reductions or increased write-offs for losses in the stock market—the vast bulk benefiting affluent folks. (Meanwhile, his old economic plan busts the budget with massive top end and corporate tax cuts).

Eliminating waste in government spending is a Good Thing (although if the candidates were serious they'd start with the Pentagon budget, the largest source of waste, fraud and abuse, not the domestic side). But we can't duck the reality: We're headed into a deep recession and we're going to need a healthy dose of deficit spending to get out of it.

The $700 billion bailout of Wall Street isn't enough. Belatedly, Treasury Secretary Henry Paulson has stumbled toward a sensible position on the bailout—giving taxpayers a stake in the upside while providing banks with new capital. But Paulson didn't demand the deal that Warren Buffett got from Goldman Sachs [1]. That's not because he isn't a good businessman; it's because he's still conflicted about whether his client is the American taxpayer or the Wall Street club. Still, if it works, the bailout of Wall Street simply strengthens the arteries and the capillaries of the economy. Given the downturn, to get the blood pumping through the system will require a hefty stimulus.

Most economists now accept we are looking at a deep and potentially extended recession. We've lost nearly a million private sector jobs since the beginning of the year. Home values are declining at record rates. Exports, which have been on the rise, will sink as the downturn spreads across the globe. State and local employment, which had also been rising, is about to decline as layoffs begin to meet rising deficits [2]. Manufacturing never recovered from the last recession. Construction collapsed with the housing bubble. Consumers—70% of the economy—are tightening belts. Restaurants are already feeling it; retail stores are likely to be decimated in the coming holidays.

Interest rates are already low. Monetary policy won't help. Thus many economists—even former Clinton Treasury Secretary Larry Summers, a devotee of the emphasis his predecessor, Robert Rubin, placed on balanced budgets—are calling for a fiscal stimulus of 2-3 percent of gross domestic product, which works out to about $300 billion. House Speaker Nancy Pelosi is developing a program that might be raised in the special session of Congress scheduled after the elections in November.

The most effective stimulus would focus on people who need help and investments that would help. Extend unemployment benefits and food stamps, bolster Medicaid. Then, help cities and states avoid cuts and layoffs that will just make things worse. Finally, begin projects on the shelf in areas vital to making our economy more competitive in the long term, starting with a concerted drive for energy independence, investing in green building and renewable energy. We need to modernize an infrastructure—everything from bridges to sewers—that is literally collapsing around us. This will put people to work and help get our economy back on track.

Anything like this, however, will face deep resistance in both parties. Last week, Republicans in the Senate used the filibuster to stop a vote on a token $60 billion stimulus for Main Street, even as they were panicked into forking over $700 billion to the Treasury Secretary for Wall Street.

The modern-day right believes only in tax cuts, not spending. In a recession, this is perverse. Tax breaks won't make corporations expand when the market for their products is tanking. We tried personal tax rebates in the last stimulus, and didn't get much bang for the buck. People sensibly paid down debts. And to the extent they spent the rebates the Rev. Jesse Jackson called "Wal-Mart gift certificates," much of the money helped sustain employment in China, not here.

More traditional conservatives in both parties—blue-dog Democrats and fiscal-hawk Republicans—oppose increased spending at all. With the deficit headed above $750 billion, they argue we can't afford it. It's time to tighten our belts. Blue dogs demand we pay as we go. That sounds good, but in a recession, it only adds to the woes. And a declining economy will only add to the deficits.

We've got a debate that focuses on what cannot happen—cutting domestic spending and balancing the budget, and slights what must happen—a large, bold plan to rebuild America, put people to work, and get the economy going.

Obama clearly gets this, but doesn't want to buck the austerity consensus. He's put forth various programs—including aid to cities, extended unemployment, investment in energy and infrastructure, and a blister of tax cuts—that add up to about $150 billion. That is not likely to be enough.

So in the last presidential debate, rather than hector candidates about what they'd cut to reduce the deficit, ask how the candidates plan to get us out of the swoon we are in, and what it will take to get the blood moving through this economy once more.