The possible need for a second economic stimulus seems to be on everyone’s mind these days, but skeptics worry about the possible cost given that the country’s budget deficit is already at a record. On this week’s edition of MacroScope TV, Randall Wray, professor of economics at the University of Missouri, Kansas City, and Lawrence Mishel, president of the Economic Policy Institute, argued that the cost of inaction could be even higher — an anemic recovery with no end in sight for the labor market’s troubles.

It may not be legislation, but a recently passed “pension guarantee” has re-kindled debate over a pillar of Germany’s welfare state – the notion of “inter-generational justice”.

The agreement, which basically calls for nationally funded retirement benefits to be locked in at current levels for all eternity, has not gone down as smoothly as its sponsors would have liked, since many nowadays see the country’s sagging birth rate as a sign coming generations will struggle to support their predecessors in old age. Two years ago when elections were far off, the government headed in a different direction, deciding to gradually expand the retirement age to 67 from 65 in order to offset both the birth rate and rising life expectancy.

While the agreement had already been supported by both parties in the awkward left/right governing coalition, some policymakers cried hypocrisy last week when it passed a final hurdle in parliament.

Outspoken Finance Minister Peer Steinbrueck kicked off the generational sparring when he called the agreement “absurd” and pointed out that the current generation of pensioners is doing better than any other in the past. Increases in retirement benefits outpaced salaries in July in one of their fastest jumps since reunification almost two decades ago, he noted. The statements could hardly have pleased his fellow SPD party member Frank-Walter Steinmeier, the Social Democrat candidate for Chancellor who had supported the idea.

Economy Minister Karl-Theodor zu Guttenberg, a rising star from the conservative CSU/CDU bloc also took his own pot shots at the agreement, calling it nothing but a “pure declaration”.

Underlying these comments and others that followed in a succession of headlines lies Germany’s demographic time-bomb. With one of the world’s oldest populations and a birth rate among Europe’s lowest, the theory goes, benefits will have to be cut as the number of contributors to the pension system falls and the number of recipients rises.

There is a possible alternative – but it would involve substantial tax hikes at a time when the opposite is in vogue. With companies are all too eager to move to countries with low taxes, cheaper labour, and fewer questions asked about social responsibility, a tax hike of this order looks like a no-starter for politicians trying to keep the economy competitive.

Thus arises the question of fairness between generations, or Generationengerechtigkeit. Why should this generation of workers pay for relatively lavish packages next to which their own retirement will probably pale in comparison? How fair can such a system be? Steinbrueck himself has said: “The ones being pinched are the 25- to 35-year-olds who want to have children.”

“People will always be making babies,” goes the famous quote from an architect of the current system, Chancellor Konrad Adenauer. But even back then in 1957 when the idea was fresh and German demographics were in a fruitful postwar upswing, some had voiced warnings. Now, with the economy floundering in its deepest recession since the war, the greatest test for “dynamic pensions”, as they were called back then, could lie in the years ahead.

Agreement aside, pension rules are already locked in for the coming years. And with the September election just around the corner, politicians may try to sweep this one under the carpet. But with some 20 million German retirees getting ready to vote, it’d be interesting to keep an eye on the polls to see which party is seen as a stronger defender of pensioners.

Eighteen months into the worst recession in decades, and the pain of the downturn is reaching into nearly every U.S. state, city and municipality.

With ever more people out of work, consumer spending has dried up, depriving local government of sales tax revenue. The continued housing slump has wiped out real estate transfer taxes, while declining corporate profits have eroded business tax revenue.

From Maine to California, the slump has drained coffers at the very time that the cost of providing jobless benefits and healthcare has risen, straining public finances.

Over the coming week, Reuters.com will publish a series on the problems facing states and cities. From Aurora, Illinois, Karen Pierog reports on the hardship created by the closure of a shelter for battered women, a victim of the crisis in U.S. social services.

Nick Carey visited the town of Pontiac, Michigan, and reports on the desolation wrought by the bankruptcy of General Motors. From San Francisco, Jim Christie and Peter Henderson report on the ticking time bomb created by California’s fiscal crisis as the state Treasurer prepares IOUs for suppliers.

Tom Ryan in New York and Andrew Stern in Chicago outline the burden that extended jobless benefits are putting on the funds that states use to pay the unemployed. From Miami, Michael Connor reports on how U.S. ports are being battered by the stark drop in trade volumes, a direct result of the collapse in American consumer demand and global trade.

Municipalities around the country are cutting services, laying off staff, furloughing others, scaling back pension entitlements and raising fees on everything from parking to soda bottles to plastic bags and cellphone ringtones.

As many as 46 U.S. states are facing fiscal 2010 budget deficits totaling at least $130 billion, according to the Center on Budget and Policy Priorities.

That’s up from 42 states with mid-year shortfalls of a combined $60 billion in the current fiscal year, according to the Washington think-tank.

Stimulus funds are a help and without them, the fiscal stress would be a lot worse. But the programs devised by the Obama administration are not sufficient to plug the gap, leaving governors and mayors with no choice but to cut spending and raise taxes — unpopular measures at any time but especially unwelcome as many families are struggling to make ends meet.

Because state revenue tends to lag economic activity, things will get worse before they get better, according to S&P Chief Economist David Wyss. Municipalities are typically the last to feel an economic recovery.

Mayors from around the country last month called for direct aid to cities arguing that they have been short-changed by the stimulus program money. Like many federal initiatives, the stimulus program makes states the primary conduit for funds, and urban centers feel they are disadvantaged compared to rural areas that have greater political clout.

“The toughest part is cutting back on programs and services that people really want in their communities, and having to explain to them why we can’t do certain things any more because we just don’t have the money,” said Philadelphia Mayor Michael Nutter.

Read more on our special coverage page, Economy: U.S. State Budgets

Five things to think about this week:

EARNINGS DELUGE
-- A heavy U.S. earnings week looms and the European reporting calendar is picking up. While more banks and financials will be reporting (e.g. Bank of America, Bank of New York Mellon, Credit Suisse and a trading update due from Barclays), results will start flowing from a wider range of sectors in both the U.S. and Europe (ranging from Apple and IBM to Glaxo SmithKline, Du Pont, Coca Cola). Health of the broader economy on display.

MACRO SIGNALS
-- The more mixed signals that earnings send, the more investors are likely to look to macro and other indicators as a cross-check of whether the stock market rebound is sustainable and whether the economy is anywhere near an inflexion point. Flash PMIs and Ifo for April will give an early indication of how economic activity was faring as Q2 got underway. Trade data from Japan is also due for release.

FISCAL HELP
 -- The UK budget on April 22 is expected to issue grim forecasts and extend a helping hand to some sectors, such as autos. The fiscal presentation will keep the spotlight on the limited room for budgetary manoeuvre in Britain and elsewhere with past bailouts and support measures leaving tough decisions to be made on public spending, taxes, etc.

G7-IMF
-- The G7 finance ministers' meeting in Washington comes soon after G20 earlier this month and therefore is unlikely to pull any rabbits out of hats. Moreover, there appears to be a less obvious need to spotlight FX given subsiding implied vols for major FX rates and the U.S. Treasury statement that China is not manipulating FX. Markets are looking for followthrough on G20 pledges.

EMERGING OPPORTUNITY
 -- Emerging markets have proved resilient in the earnings season, withstanding occasional down days on major indices and most recently drawing support from nascent signs that the Chinese economy has put its worst quarter behind it. Investors' willingness to look anew at the safer parts of the emerging universe is prompting some sovereigns to use this window of opportunity to launch eurobonds or look into doing so.

It’s budget day in the USA, so we thought we’d have some fun with numbers. Assuming you’ve already seen the big news, we’ll go straight to the highlight: The $1.75 trillion fiscal 2009 deficit forecast  represents 12.3 percent of GDP, the largest since 1945.

The budget wasn’t the only set of scary numbers released on Thursday. We also had this bit of news from the Federal Deposit Insurance Corp: Their list of “problem banks” grew to 252 at the end of the fourth quarter, from 171 in the previous quarter. Those problem banks had $159.4 billion in assets. The FDIC’s deposit insurance fund? A mere $18.9 billion. Anyone see a problem here? 

Then there was the daily barrage of ugly economic data. The number of U.S. workers drawing jobless benefits hit an all-time high of 5.1 million — roughly equal to the population of St. Petersburg, Russia — and new home sales sank to the lowest level since 1963.

Reuters photo of the U.S. national debt clock by Mike Segar