10-30-08, 12:04 pm

Nine straight months of job losses, a collapse in consumer spending, growing home foreclosures, and few good signs for the future, all point, economists now say, to the fact that recession has overtaken the economy.

Today, things appeared to get worse. The government released its quarterly GDP estimates showing the economy shrank by 0.3 percent. The collapse was fueled by the sharpest drop in consumer spending in 28 years, economist Josh Bivens of the Economic Policy Institute (EPI) told reporters on a teleconference after the report was released.

Bivens blamed the the contraction of consumer spending that led to the recession primarily on the collapse of the housing market.

In addition, government data revealed that state and local governments are struggling to make ends meet and dragging down economic growth, and labor income has also fallen over the past three consecutive quarters, Bivens said.

Consumer spending is linked to labor income, Bivens noted. People can only spend in the economy when they have good paychecks or credit. Since both income is falling and debt has many working families unable to continue to spend at the same rates, consumer spending has suffered.

'I think this bodes badly for the coming year,' he said. 'We really have to wonder, since consumer spending is contracting, where are we going to get a boost to economic growth? And it's not from workers' paychecks for the foreseeable future.'

The GDP report hints that a quick recovery is unlikely, added EPI head Jared Bernstein. 'American consumers have hit a wall they haven't seen in 17 years,' he said. The report signaled a lack of strong demand, which is needed right now to turn the economy around.

Bernstein noted a bright spot in the GDP report. Federal government spending added to economic growth, but not enough to overcome the collapse in consumer spending, he said.

In addition, Bernstein argued that 'supply-side' stimulus such as more tax breaks for corporations or investors is simply unable to turn the economy around. Supply-side policies do not boost consumer spending in a significant way. A demand-side stimulus package is needed instead, he stated.

Bernstein offered several key demand-side measures. First, the federal government needs to make cash available directly to states to overcome budget shortfalls and help them make ends meet. Second, unemployment insurance benefits should be extended to cover long-term unemployed workers. Third, safety net programs like food stamps, low-income energy assistance, and the like should be boosted. Finally, infrastructure investments should be made to create jobs and increase economic activity.

The analysis offered by Bernstein and Bivens points to sharp practical and ideological differences between John McCain's and Barack Obama's economic proposals. In line with Bush's thinking that one-remedy-fits-all-recessions, McCain has offered more supply-side concepts: tax breaks for corporations and wealthy investors.

On the other hand, Obama, demonstrating a keener understanding of the nature of the current crisis, has proposed solutions closer to what the EPI economists advocated. Obama has offered direct economic relief for working families in the form of tax breaks to prime the pump of consumer spending as well as investments in job creation through infrastructure developments.

For his part, McCain has already failed to lead his party to pass such a stimulus package in late September. Instead, after an erratic and confused response to the Wall Street bailout, McCain sat on the sidelines as Senate Republicans filibustered a Democratic bill that would have injected new resources into the hands of working families.

McCain's right about one thing. He has indeed been tested. But he has failed that test.

--Reach Joel Wendland at