Sentient observers know that American state and local governments face a historic crisis--that they are cutting vital services and raising taxes, mainly on those already most stressed in difficult times. Schools in Oregon are closing early; New York City plans to close firehouses and reduce garbage pickups. States have already closed gaps of $50 billion in their 2003 budgets. Now they face the necessity of imposing measures almost twice as drastic for 2004.

In this crisis, fiscal assistance from the federal government to the states and cities--in two words, revenue sharing--remains our most urgent economic policy need today. To see this, just compare it with all the alternatives.

Monetary policy has run out of steam. Continued low interest rates help to ward off the evil day when consumer bankruptcies and mortgage foreclosures begin to explode, but they cannot produce a recovery on their own. That will happen only after household balance sheets improve--a process of paying down consumer and excessive mortgage debts that has barely started. And so Alan Greenspan has faded into the wallpaper; he emerges nowadays only to make timidly optimistic forecasts. There is nothing much more he can do.

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