I am not going to say that everyone agrees on this - because some people are being paid very well to disagree - but most of us think that the US economy is currently suffering from a lack of demand for goods and services.

It works like this: When the housing bubble burst creative destruction set in. Jobs in construction and the many industries related to housing vanished. Home values shrank, destroying most people's main form of wealth while the stock market plunge took care of the rest of us. Even our glorious financiers have experienced cutbacks in their well deserved compensation and increases in uncertainty.

As incomes and wealth shrink we save more - not a bad thing - and spend less. Unfortunately, when we spend less, goods and services go unsold which leads to cutbacks in employment and output. Which leads to further cuts in spending. We are in a vicious circle. Jagdish Bhagwati called this damnification.

Modern governments are one of the few things that can, potentially, slow this process. As incomes fall, tax revenues drop and social welfare payments rise. Governments also try to maintain spending on education and public services if they can.  This draws down reserve funds and increases borrowing. If this works one sector of the economy at least is not cutting back. It may even be expanding spending and thus helping to sustain demand. Economists call this automatic stabilizers.

Except that most state governments in the US don't have any reserve funds and cannot borrow to finance current spending, by law. Even as federal spending on food stamps and so on rises with a recession, state spending falls. Tax revenues drop, teachers are laid off, payments to doctors and hospitals are cut state offices close. Damnification.

More on this from Brad DeLong here.

Which is why aid to the states - which the Senate moderates cut to make room for more tax cuts - is so important for any program that hopes to stop this slump from getting worse.