Why We Need a Real Fiscal Stimulus Package, Pronto

Make no mistake. We're in a recession. Today's unemployment report showing nonfarm payrolls falliing by 49,000 jobs, is the fifth month in a row in which payrolls declined. Over the past six months, the economy has shed 411,000 private sector jobs. You will hear some cheerleaders tell you to disregard all this, pointing out that the economy continues to grow at a healthy pace. Baloney. Those growth numbers are illusory, based partly on the fact that, with fewer employees, productivity per employee has obviously grown. And partly on the temporary effect of the little stimulus package now in place.

What to do? Monetary policy is frozen. Bernanke and company don't dare to cut rates now, for fear of spurring inflation. They're wrong -- the inflation isn't coming from inside the United States. Employees have no power to demand higher wages, and companies have no power to raise prices. Inflation is coming from outside the US. Demand from China and India is pushing up commodity prices. And the dollar is dropping, which makes everything we buy from abroad more expensive. The Fed is correct to worry about only one thing when it comes to cutting rates -- that investors will be even less enthusiastic about returns they can get in the U.S., and will move more of their money into euros, yen, and a basket of other currencies. This will drive the dollar down further and thereby push up the prices of much that we buy from abroad, spurring inflation. But the chain of cause-and-effect here is not so powerful or direct as to suggest that no rate cut is warranted now. The Fed should cut rates again. If we the economy gets moving again, and investors will flock back.

Fiscal policy is a surer bet, but Congress -- especially the fiscally-conservative followers of Herbert Hoover called "blue-dog Democrats" -- is still hung up about budget deficits. Now is the time to exhume John Maynard Keynes and understand that government must be the spender of last resort when there's inadequate domestic demand. And the best and most urgent government spending now is for infrastructure -- especially public transit (see my postings below). Dems should move quickly.

More basically, the problem is weak consumer spending, which is directly related to the failure of jobs and wages to keep up. This problem, as I've indicated, has been long coming, although masked by the housing bubble that allowed consumers to borrow against their homes. If the middle class is to continue to provide adequate spending to keep the economy going, taxes must be reduced on the middle class and the fiscal gap filled (deficits have to be filled eventually) by marginal tax increases on the highest incomes. Because their incomes are so high, the rich don't spend nearly as high a percentage of their incomes as moderate-income and poor people (after all, the definition of being rich is having most of what you already want). The rich will not and cannot keep the American economy going on their own.