Right now the economy is already slipping into recession. IT will be hard to tell except in retrospect. A recession is a sustained drop in output, wages and economic activity. This means that until a bad month is huddled together with other bad months to produce a noticeable peak in an expansion, you can't tell, even with perfect knowledge that a recession has started until it has been going for a while. And we don't have perfect knowledge, as economic numbers are revised, sometimes a long time after the fact.

This leads to the question of using stimulus to avoid, or ameliorate a recession. For the last 30 years, monetary rather than fiscal policy has been preferred as the way to stabilize the economy. There are some sound theoretical reasons for this, and there is a practical political one: central bank chieftains don't face the voters. It's handy to blame someone not running for office for economic woes.

So what about the question of stimulus right now? Larry Summers says yes. Suddenly Bush is open to it, but only because he smells a way to extend his tax breaks for the very rich. Congress is interested, partially because they need to prove they are "doing something."

Is there an answer?

Well yes. But it isn't the answer that people are going to like. Anybody.

In the abstract world of economic spherical cows, the answer here would be simple: the Fed should keep tightening until inflation is really dead, and the Federal Government should buffer the people who are getting hammered by the necessary disinflationary policy. Then near the bottom of the recession the Federal government should spend on projects that are suddenly cheaper because of lower wage costs and materials costs, the best time to build something is when there is a great deal less competition from commercial and residential construction. The Fed will also start easing at this point, and the economy has a rebound.

Absent the Federal spending, it takes much longer for the economy to rebound, and the beginning of the expansion feels far more like a recession than a recovery. The reason the last two recessions have taken so long to produce gains for workers, is that Federal spending was either hamstrung by the S&L Bailout, or with held until the invasion of Iraq. Once spending started reaching the economy again, jobs rebounded. The trade off is that slower recoveries often lead to longer expansions. Whether this is good is debatable, and I'll leave it aside here.

This is because the present is not in the land of spherical economic cows of uniform density, but as Capital Gains (linked from Dr. DeLong's blog) implies, the a real world Congres and a real world President who have an extremely poor track record on doing what ought to be done, and instead using crisis as an excuse to do what they want. Paul Krugman noted that Bush always promotes Tax breaks for the wealthy regardless of the problem. Now tax breaks, even for the wealthy, can from time to time be a good idea, and stopped clocks eventually get it right, but ones with their hands smashed never do.

In this environment a classical Keynesian would put forward a very simple plan: various forms of income stabilization for those people who live pay check to paycheck and have month left at the end of their money. These are the people who don't save even when times are good, and when times are bad are in danger of slipping out of the work economy - and into the black and grey economies.

The stabilization would be targeted, of short duration, and not designed to "stimulate" the economy, as provide a net over the bottom. There would be some "stimulus", but it would be more aimed at saving people who play by the rules, and buying time for the painful medicine of disinflation to work. One can't expect people losing their jobs, homes, lives and place to support a policy, even if abstractly inflation has got to be slowed.

The more important work of fiscal stimulus comes when the laundry list of undone things comes up. Here is an example of how the liberal system used the worst impulses of congress critters to good effect. So it's pork, so long as it isn't a bridge to nowhere, it will repay, and there is no better time for the government to spend, than when there are people who need work, suppliers that need orders, and the speculative frenzy - with its temptation to overbuild capacity in places where it won't be used - is over. If people still think a bridge is a good idea when the economy is bad, chances are they need it and it will be used.

In the present however there are many problems with this classical Keynesian prescription. The first is that Cousin Ben is a conservative inflationist. He did not raise rates until inflationary expectations were squeezed out of the system, and instead ended up with about a D+ hard landing. Inflation is still here, the speculative frenzy happened, and the downturn comes anyway. While he isn't in the F range of handling things - we aren't in a deflationary spiral or locked in chronic high inflation - it's been bad enough that the next President should invite him to return to his academic career.

The next problem is that the cost of the buffering insurer of last resort spending, the kind that is really a no brainer, is going to be high. Bush is going to charge at least as much in revenue cuts as he gives out in recession relief. This means that the cost of the buffering just doubled.

But wait! There's more!

The reason that we are seeing inflationary pressures is that there is a good old fashioned dollar glut. Too many investment dollars chasing too few investment opportunities. Many of these dollars are going to Saudi Arabia and China, and many are being parked in oil futures and other commodities. This is increasing the price of resources, such as gold, oil and so on. This means that Bush will want to give more money to the very people who are generating inflation. So not only is the buffering going to cost more bucks, but it will deliver less bang. The money being given to people at the bottom will be spent on buying gasoline and food. This cost is already leading to "crowding out pressures" - to wit, the calls to suspend gasoline taxes. Now gasoline taxes are spent on roads and bridges. That is, they are investment. This means that, very directly, energy inflation and speculation are creating a preasure to crowd out investment, so that more money can go to Saudi Arabia. And there is no assurance that the people selling gasoline won't just pocket the difference.

So buffering is made questionable by the poor track record of the people who are passing it.

What about the stimulus part?

That too is in trouble, because decades of "returning money to the tax payers" means that states have much smaller rainy day funds than they used to. Tax reductions generated more inflation, and now there isn't money to stimulate at the state level. The Federal Government has also been on a borrow and squander binge in Iraq, which has also pushed up prices of the very things that would be used to build infrastructure.

This means that his expansion is not only the worst in post-war history, it is setting up a situation where there is the least freedom to counter-cyclically combat it. And we have both fiscal and monetary authorities whose record is pitifully bad at keeping within reasonable bounds. As I've noted before, the likelihood is that there will be a second recession relatively close to this one.

However, the blow back from Bush isn't fully enumerated yet. The housing crisis, sooner or later, is going to cause financial institutions to become insolvent. Right now central banks and foreign investors are infusing liquidity, but this is cherry picking - they are going to try and pick the institutions that are fundamentally sound, merely in a short term liquidity squeeze. The ones that are in bad shape - in general - are going to be allowed to implode. These will have to be bailed out by the tax payer.

This bailout will be at least as large as the S&L bail out that hamstrung the US in the early 1990's. It also means that at the very moment that Congress is going to have the best reason to pass a genuine stimulus bill, it will be stuck with the bailout bill from this expansion.

A creative executive and an able, or at least ordinarily venal, Congress could do something interesting, and commit to an overhaul of the tax system, banking system and monetary system. That's not going to happen. Bush doesn't do nation building, and that means here in the US too. The Federal Government under Bush has had three massive reconstruction opportunities - Afghanistan, Iraq and New Orleans - and has bombed on all of them. We are talking about a President who has flunked nation building three times.

So here we are, a proven loser in the White House, an incompetent in the Fed Chair who has forgotten how to run a central bank, and a Congress which went along with Bush's borrow and squander and has had no sign of being able to execute on fiscal discipline. Asking whether we should demand a stimulus bill or leave it to the Fed is like asking whether you want Laurel or Hardy to land a 747.

So abstractly we should pass a clean buffering bill - increased unemployment insurance, increase in food stamps, suspending drop offs of welfare, suspending interest and perhaps payments on things such as student loans, and some direct aid to states so that they aren't laying off government employees right at the time services need to be delivered - and admit that it will be up to the next President to survey the situation and pass an economic package based on the facts on the ground at Zero Hour.

However, in the present circumstances, none of that is going to happen in good order. Instead, as a Christmas Tree - a bill that has to pass and so gets loaded with billions of hand outs to people who don't need them, as say the WTO compliance bill was some years ago - we are likely to see from Warshington a bill that will create more inflation, and make things worse in the hear and now for people, and worse down the road.

I wish I had some faith in the moral cripples in Washington. But they were elected to end the war, they didn't do that, and to end the corruption, they haven't done much about that either. I wish I had some faith in Bernanke. Wait, I've got complete faith in him to lower rates way too fast, and then allow prices to explode, since only when there is undeniable inflation, that is even he can't deny it, will he change course.

The answer then is that we are hamstrung from doing the right things in the present, because we have a broken politics. This is a situation where there should be real bi-partisanship - both sides understanding that this is something being done for the good of the country, and off limits from partisan or personal agendas. Nothing wrong with fighting over differences, but using necessary bills to attach bad riders only means that there is an aversion to doing the right thing when needed, and waiting to long.

This economic crisis was pretty clear even last summer. Then would have been the time to set aside funds for a possible downturn, to be spend when triggered by later circumstances, or not at all if monetary policy had been properly applied. It wasn't, but no matter about that. It isn't too late - we've seen Congress move very fast to authorize domestic spying, or to condemn Move on for telling the truth about the fake results of the Splurge in Iraq - but it might be made too late.

This is the result of broken politics: partisan when it should not be, bi-partisan when that means a conspiracy of cupidity. The fix for this is more pain. When people experience enough pain to realize that they can't let the major networks and party hacks select their leaders, and that the cost for letting other people run the government is severely out of line, then they will either demand change, or the US will slip into a downward spiral to be replaced by other powers. Either way, it will solve the current problems, though perhaps by replacing them with worse problems

Abstractly, what we ought to do isn't hard: raise, not lower, interest rates, then lower them at the time of the bail out, to make borrowing to bail out cheaper. Buffer the pay check to pay check classes of the economy, and then put in place an economic stimulus package - decided by the results of an election over just that issue - and go forward.

Not going to happen that way. As a result, pass or don't pass a stimulus package as political advantage might require, but for actual people on the ground, the results will not be noticeable, though of course different people will win or lose depending on the results.

So what should us outsiders do? It's rather simple: just as we had to call for out of Iraq, because the people who were running the stay in Iraq option were doomed to foul it up, we need to call for "clean stimulus" now, knowing that it won't go down that way, but which will at least be a prod to the next Congress and the next President to return to saner policies. We also need to find ways of making the current Bush Dog-Bush Bog alliance of conservative Democrats and Reactionary Republicans uncomfortable, because it is their fiddling that is making Rome on the Potomac burn.

The problem with stimulus is that it asks the wrong question. Is this expansion worth keeping alive? The answer is no. The only thing that keeping it alive for another year is going to do is make it more expensive to clean up. Sometimes creative destruction is the best option, and the government needs to get out of the way and mainly let it happen. And right now, this expansion is costing us money with every minute it runs.