where_next_sign.thumbnail.jpgThe compromises necessary to pass the recovery bill in the Senate damaged it in several ways. The overall size of the package was reduced, evidently for the cosmetic purpose of keeping the top-line number below $800 billion. And funds urgently needed to stabilize state and local governments and for construction were cut back, along with the credit against the payroll tax – evidently to make room for a rollback of the alternative minimum tax, a step with a strong political constituency but a weak economic rationale.

In my local paper Thursday morning, I read of $20 million that will be cut from our city budget next year, including a day labor center, public library hours, and overtime for the police force. Cuts like that – and in many places they are far deeper than here – are going on everywhere, and the bill as passed will help but it will not stop them. Contrary to Grover Norquist’s comment in this space, police, libraries and day labor are part of the productive economy, as much as anything else.

It is difficult to know what the so-called moderate Senators were thinking. Do they have special insight into this crisis? Do they have their own forecasters, with deep understanding and good track records in these matters? Do they have their own models? Do they have, in other words, any ground for believing that less than $800 billion, spread over two years, will be enough to bring the economy back? If so, they weren’t saying so, so far as I could tell.

We have a bill. In the most likely case, it will slow the collapse but not stop or reverse it. And it will come into effect alongside a bank rescue plan that stands very little chance of reviving the credit markets. So we have one part of a recovery plan that is helpful but probably insufficient, and another part that most likely will not work at all. The prospects for an early exit from the slump are therefore not encouraging, just yet.

What is to be done? On the fiscal front, for the moment, nothing more. There seems to be no alternative now to waiting for events. Notwithstanding job losses at half a million a month for three months — almost the workforce of the state of Maine, three times over — Olympia Snowe and Susan Collins seem to need better evidence than they’ve seen so far. In four to six months, if job losses don’t reverse, the country will demand more action.

If that’s correct, the gaps and hesitations in this recovery bill should be the first things we repair. To wit:

– make aid to states and localities flexible and open-ended. The goal should be to stop all cuts in public services and layoffs of staff. States and localities should be offered a simple deal: no service cuts and no changes in tax rates. In exchange, the federal government will cover the gap in their revenue for the duration. Alternatively, the federal government could simply offer general revenue sharing on a per capita basis.

– establish and fund a full-fledged National Infrastructure Fund with the capacity to finance and to coordinate public investment projects on an ongoing basis. Congress would therefore largely delegate decisions over the type of local capital investment, including school construction which was cut from the Senate bill for no defensible reason.

– increase Social Security benefits across the board. The purchasing power of the elderly as a group is now gravely eroded by the collapse of stock market values, and the policymaking community needs to realize that the grand experiment in funding retirements via the stock market is ending. For the future we will need more Social Security, not less. And that means that the historic political link between Social Security benefits and the revenues from the payroll tax should be suspended.

– declare a full payroll tax holiday for the duration of the crisis. A holiday has advantages over the credit scheme, as it can be implemented at once for all workers and employers. The holiday could be made subject to a trigger, so that when the economy does begin to recover rapidly, part of the tax can be restored.

– pursue the foreclosure moratorium just announced, establishing the equivalent of a Home Owners Loan Corporation to deal with troubled mortgages, via renegotiation or conversion to rentals. This can be done, largely, through Fannie Mae, Freddie Mac and the Federal Reserve Board, but it will require sufficient staff to inspect and supervise mortgages at the retail level. Apart from this, and the ongoing nationalization of commercial paper markets, there isn’t much more to expect from the Federal Reserve at this point.

It would be useful for friends of these ideas, in Congress and in the public interest community, to establish working groups to build support for them during the months ahead, if and as the crisis deepens.

Meanwhile, the most urgent need is for the Treasury department to re-examine the basic premise of its plans for the banking system. Present plans provide unjustifiable guarantees for bad assets, bank shareholders and the incumbent management, at huge taxpayer expense, with no prospect that normal credit relationships will be restored. So long as this is the case, the scale of taxpayer losses and the necessary scale of the next fiscal recovery plan will grow and grow.

(A version of this post previously appeared on NJO)

James K. Galbraith

James K. Galbraith