According to the CBO’s estimates, we’re facing an output shortfall of almost 14% of GDP over the next two years, or around $2 trillion. Others, such as Goldman Sachs, are even more pessimistic. So the original $800 billion plan was too small, especially because a substantial share consisted of tax cuts that probably would have added little to demand. The plan should have been at least 50% larger.

Now the centrists have shaved off $86 billion in spending — much of it among the most effective and most needed parts of the plan. In particular, aid to state governments, which are in desperate straits, is both fast — because it prevents spending cuts rather than having to start up new projects — and effective, because it would in fact be spent; plus state and local governments are cutting back on essentials, so the social value of this spending would be high. But in the name of mighty centrism, $40 billion of that aid has been cut out.

My first cut says that the changes to the Senate bill will ensure that we have at least 600,000 fewer Americans employed over the next two years.

The real question now is whether Obama will be able to come back for more once it’s clear that the plan is way inadequate. My guess is no. This is really, really bad.

I also keep hearing that Obama's going to be able to come back and ask for more money for all those important things down the road, and I wonder if I'm living in the same country as these people. If the Republicans were willing to defy Obama at the moment of his greatest power, coming off a nearly hysterically euphoric inauguration, in the middle of a crisis with a clear mandate to change the country, what in God's name makes anyone think they will be less likely to block this kind of "spending" down the road?

Obama's going to be coming to the congress for God knows how many more gazillions in bailouts for the financial system. There are two wars that continue to burn vast amounts of money, not to mention the US global military empire in general. There is the massive federal police state apparatus that has been built up over the past seven years that has to be funded or the terrorists will kill us in our beds. All of these things are sacred and will be funded no matter what, although the Republicans may put up some kind of a token fight against the finacial system bailout and the Democrats may put up a token resistence to military spending. (Sadly, nobody will raise a question about the police state funding.)

Those are things that are considered absolutely necessary and vital government expenditures that can't even be touched, particularly by a Democratic majority, and the Republicans will use them as examples of their responsible leadership. They will say they just have to draw the line at "pork" and "entitlements," which the country just can't afford, what with all the unemployment and all.

They have shown their cards -- they are cynically banking on the economy failing to get themselves back into power. And they have the media (and possibly even the administration) helping them.

Newsweek's cover this week is "We Are All Socialists Now." The article calls it a "center-right socialism" which is just funny. But then the whole piece is bizarrely oxymoronic and contradictory, just like the economic debate in the congress. It says that we are inexorably moving toward a European style mixed economy and that George W. Bush is the one who killed Reaganism with his prescription drug benefit and bank bailout. (Conservatism can never fail, it can only be failed.) But it all sounds almost reasonable until you get to this:

Now comes the reckoning. The answer may indeed be more government. In the short run, since neither consumers nor business is likely to do it, the government will have to stimulate the economy. And in the long run, an aging population and global warming and higher energy costs will demand more government taxing and spending. The catch is that more government intrusion in the economy will almost surely limit growth (as it has in Europe, where a big welfare state has caused chronic high unemployment). Growth has always been America's birthright and saving grace.

The Obama administration is caught in a paradox. It must borrow and spend to fix a crisis created by too much borrowing and spending. Having pumped the economy up with a stimulus, the president will have to cut the growth of entitlement spending by holding down health care and retirement costs and still invest in ways that will produce long-term growth. Obama talks of the need for smart government. To get the balance between America and France right, the new president will need all the smarts he can summon.

That is the state of elite American thought right now. Total incoherence.

We may need to make the government grow in order to deal with the massive problems, like deep recessions, global warming and an aging population, but it will create a big welfare state which will deny our high growth birthright. (That birthright, by the way, hasn't actually been realized in more than 30 years for the vast majority of Americans.)

The president is faced with having to do what nearly every economist in the world says he must do --- boost spending. But it requires borrowing and that's bad. So we will need to cut all those big, nasty European welfare programs after all. And Gawd knows there can't be any more spending that isn't "investment" (as defined by conservatives as tax cuts and bridges to nowhere.) The most important thing, as always, is to not be French.

I'm sure some of them thought they were being boldly unconventional when they "diagnosed" Obama's problems, but the truth is that they are defending the status quo. Instead of using their space and influence to explain some rather basic facts about Keynesian theory they present the so-called paradox of stimulus to cure a problem caused by borrowing and spending as something that will have to be "paid for" almost immediately by destroying the safety net. Apparently, they think this makes sense, both economically and politically.

I know that I'm beating the drum in boring fashion about the impending "entitlement reform" agenda but it's really got me spooked that they are talking about it while we are fighting a major recession. I guess it's supposed to make wall street and banking concerns feel confidence that they still own the government, but to people who are retired or about to retire (and there are a boatload of them) it makes them want to take their money and either move to another country or hoard it under the mattress. At the very least it scares the hell out of people who are already living on very little, losing their jobs and insurance and see their futures slipping away. It's hard to see why any progressive would put this on the table right now, particularly as some sort of "Grand Bargain" with people who want to destroy it.

And I doubt that calling health care reform "entitlement reform" is going to lead to a positive outcome. "Entitlement reform" by its very name implies that social security and medicare are unearned benefits, and to "reform" them under the rubric of saving money, which seems to be the plan, is a recipe for getting punk'd. If there is some super-duper Machiavellian plan that Rahm and his Blue Dogs are cooking up to protect social security and create universal health care, then the first order of business needs to be to ditch the word "entitlement." (But I don't think Rahm and his Blue Dogs are actually trying to do that, do you?)

Like most Democrats of the past three decades, they believe that if they can just get issues like social security, health care, abortion, trade, unions, crime, defense, tort reform, regulation etc "off the table" then nobody will ever have a reason not to vote for Democrats again and everything will be wonderful. And they've been successful to some degree --- they have agreed on the death penalty, gun control, tough criminal sanctions, the drug war, defense spending and to never raise taxes on the rich above the historically very low agreed upon level of the Clinton years. And with the stimulus debate, they've now pretty much succeeded in defining most government spending that directly helps people as "silly," so they've made even more progress in just the last two weeks. Their strategy has been to try get people to stop arguing about issues by capitulating rather than by trying to win the arguments. I guess they feel it worked.

There is some other, overarching logic to the stimulus debate and entitlement reform, though, and it's important to keep it in mind. It's the logic of disaster capitalism and there has never been a more perfect storm in which to apply it. "Entitlement reform"and "Grand Bargains" in this environment, particularly with a perceived mandate for compromise with wingnuts at all costs, looks very much like a form of shock therapy.

Perhaps the administration sees it more as a Nixon goes to China kind of thing, but that assumes that passing legislation with Republicans is the same thing as a president acting as a head of state (and that they don't actually agree that social security and medicare must be cut to balance the budget.) If "entitlement reform" is on the agenda, I can't see how universal health care happens --- or anything else that costs money, for that matter (unless it involves war or imprisonment.) This first skirmish, over the stimulus, has already defined necessary spending as that which Susan Collins and Ben Nelson approve of. That doesn't bode well for expansion of the safety net.

I'm hopeful that this is a lesson for the administration and the Democrats in congress. Despite a big electoral victory and a mandate for change, they are not going to get cooperation from the Republicans and Presidents Nelson, Snowe and Collins aren't the kind of people who have the imagination or necessary boldness to lead us out of this mess. Obama is going to have to be a much different leader than he wanted to be. Post-partisan mediation isn't going to work. He's going to have to get the people behind him on the specifics and enlist them in the cause.