Can more spending revive the American dream?

Why any new stimulus plan should boost spending on infrastructure and education.

What the American economy needs is spenders.

It needs big spenders, such as states and municipalities, to build bridges, pave roads, and keep garbage trucks running and police on the beat. It needs tens of millions of smaller spenders to buy blankets and cars and television sets to help businesses prosper so they can keep their employees.

More spending is the goal of a fiscal stimulus package or packages being debated in Washington as President-elect Obama prepares to move into the White House.

Such spending is required, says liberal economist Robert Kuttner, "to prevent recession from turning into depression."

The fear is that the credit squeeze plus rising unemployment and a weakening business scene will snowball, leading to even more businesses cutting back or closing their doors and more people losing their jobs.

One spending suggestion of Mr. Kuttner and other economists is to step up federal financial help to states and municipalities, many facing severe budget squeezes. There is at least a $1.6 trillion backlog of needed infrastructure projects in the nation that could be usefully launched, reckons Kuttner, author of a new book, "Obama's Challenge: America's Economic Crisis and the Power of a Transformative Presidency."

Because of reduced funding by states, many state colleges and universities are boosting tuition fees, making it more difficult for poor and middle-class families to afford higher education for their children. State schools, notes Kuttner, are becoming more like private universities with their $40,000 plus charges for tuition and board.

But with the federal government already facing a likely $1 trillion deficit this fiscal year, wouldn't more federal outlays be an irresponsible fiscal policy?

"No," says Kuttner. "It is the lesser evil."

Without the help of federal subsidies and policies to help low-and-middle-income people, the economy could fall into a depression with its multiplicity of economic damages – more joblessness, additional business failures, declining incomes, extra misery in general. Federal revenues in a depression "would fall through the floor," making for even bigger budget deficits, says Kuttner.

Besides, argues Kuttner, the United States can afford huge federal deficits for two years or so. Total federal debt currently is sized at about 40 percent of gross domestic product, the nation's total output of goods and services. That's "relatively low" by American historical standards and by comparison with some other well-to-do industrial nations, he adds.

Many economists today are deeply worried about the prospects for the American economy. The US recession, says Allen Sinai of Decision Economics Inc., will probably extend through most of 2009, making it longer and deeper than the previous 16-month recessions of 1973-75 and 1981-82. And now a global recession is "a reality."

Mr. Sinai calls for Congress to meet immediately to "implement stimulative macroeconomic actions." In other words, step on the economic gas.

There's another reason to strive hard to return the nation to prosperity. Last week, the Pew Charitable Trust issued another report on "economic mobility" in America. Pew's research indicates that the "American dream" may not be a myth, but it is rather a weak reality. On average, poor people and their sons and daughters have difficulty in rising up the income ladder to the middle class or becoming rich.

Certainly the poor in Canada, France, Germany, and the Scandinavian nations have a better chance of rising from the bottom rung than in the US, says John Morton, managing director of economic policy at the Pew trust.

Only 42 percent of American children born into the bottom 20 percent income level rise into a higher income level within 30 years – a generation. And 45 percent of children of middle-income African-American families fall into that bottom 20 percent within a generation.

The "meritocracy" is not functioning well, says Mr. Morton. The rising economic tide is not lifting all boats as well as it used to.

Traditionally, Americans have had extraordinarily optimistic views of the economic prospects for themselves and their children. This may be one reason they have tolerated in the past 30 years a major redistribution of income in the nation to the top 1 or 2 percent of its citizens from those with lower incomes. The gap between the rich and those below has not been so great since 1928.

Now, though, American views on economic prospects for themselves and their children has become "very pessimistic," says Morton. This may even be a factor in the election of Barack Obama.

Morton sees the possibility that a Washington program to boost the economy could be designed to improve mobility as well. For instance, a larger investment in education could help, since a good education, especially a college education, is a key element in allowing the children of poor families to rise into the middle class. As it is, enrollment rates in higher education are stagnating and graduation rates declining.

In other words, spreading the wealth, that is, redistributing income by various policies, could also make the American dream more real.