At first blush, the phrase “the real economy” seems jarringly redundant. As opposed to what? The surreal economy? The fictional economy? But after several weeks of obsessive coverage of the rolling crisis in domestic and now international credit markets, the phrase is useful to distinguish from the financial economy, that sector of American capitalism that has received nearly all of the media’s attention since the staggering events of mid-September. And the real economy is cratering.

There are two problems at hand. The first is a recession in which much of the country is already mired (a recent New York Times graphic showed that 14 major cities are in recession). The last recession, in 2001, was mild. This one won’t be–a point on which there is near unanimous agreement. The second problem is that the expansion that preceded this recession was not very bountiful, to put it mildly, for the vast majority of working people. According to nearly every metric–median wage, household income, household debt–the nonrich are worse off now than they’ve been at the end of any previous expansion in the postwar period.

Which brings us to the $700 billion. Already, establishment consensus is hardening around a deceptively simple assumption: that the passage of the Paulson bailout plan means that the next administration will have to cut back on its spending. In the two presidential debates and the vice presidential one, the moderators asked variations on the same question: in these lean times, how will you tighten the government’s belt? While Barack Obama has responded by emphasizing the need to “prioritize,” John McCain has gleefully promised cuts, cuts and more cuts.

The premise of this entire discussion is, quite simply, nuts. First, as a technical point, the only way the bailout will actually cost taxpayers $700 billion is if every asset purchased by government falls in value to zero. If that happens, we’ll have bigger things to worry about than the government debt. More important, the idea that government should cut back spending during a recession is dangerous folly. Consumer spending currently makes up 70 percent of GDP, and it’s about to nose-dive. State and local tax revenue will fall, which will force deep service and spending cuts. The only way to relieve economic suffering, create jobs and restore stable growth is for the federal government to step in and bolster demand by spending money. Lots of it. There’s no shortage of places to invest: extended unemployment payments, universal health insurance, large-scale social programs and infrastructure. And there are new revenue streams to be found: a peace dividend from ending the Iraq war, repealing the Bush tax cuts for the rich and putting a price on carbon.

But there’s no way around it: there will be higher deficits and more debt. That will have some tough consequences down the road, and it will certainly make the bond market shed a few tears. The alternative, though, is far worse: Widespread immiseration. Unemployment higher than we’ve seen in a generation. Massive bankruptcy and epidemic foreclosures. Skyrocketing poverty.

Like an army burning the fields as it beats a retreat, the Bush administration is leaving the next administration with a huge Treasury program conservatives can use as an excuse to sabotage the entire domestic agenda of a Democratic president. Progressives have to push back against this argument, starting now. They can begin by pointing out one cruel irony of the conservatives’ logic: after supporting the use of taxpayers’ money to save the bond market, isn’t it a little perverse to use the bond market as an excuse not to save millions of Americans from destitution?