Jan. 8 (Bloomberg) -- President-elect Barack Obama warned that the U.S. risks sinking deeper into an economic crisis without an infusion of government spending and a cut in tax rates and urged Congress to act quickly on a stimulus package that may total $775 billion.

In a speech directed at lawmakers and the public, Obama drew a portrait of a nation where family income is falling, the unemployment rate is rising and a “generation of potential and promise” may be lost without federal action.

“I don’t believe it’s too late to change course, but it will be if we don’t take dramatic action as soon as possible,” he said in the address, delivered at George Mason University in the Washington suburb of Fairfax, Virginia. “If nothing is done, this recession could linger for years.”

The bleak outlook seemed designed to prod Congress into moving fast to pass a stimulus package aimed at getting the economy going again, even as signs of resistance were emerging at the Capitol. The stakes are high: The U.S. is in the middle of a deep recession, and economists of all stripes agree that aggressive government action is needed.

Economic Signals

Just hours before Obama spoke, reports from private industry and the government underscored the effects of the yearlong slump.

Retailers, including Wal-Mart Stores Inc., said consumers pared their holiday shopping and profits were squeezed by discounts. The government said the number of Americans collecting unemployment benefits surged to 4.6 million, a 26- year high, and economists surveyed by Bloomberg News expect the Labor Department to report tomorrow that the jobless rate jumped to 7 percent in December, the highest level since 1993.

The Dow Jones Industrial Average fell 89.44 points to 8,680.26 at 2:35 p.m., while the Standard & Poor’s 500 Index fell 4.81 points to 901.84.

Obama blamed the economy’s troubles on “an era of profound irresponsibility that stretched from corporate boardrooms to the halls of power in Washington, D.C.”

Wall Street executives made “imprudent and dangerous decisions,” banks offered and borrowers took loans without regard to whether they could be repaid, and politicians spent tax money “without wisdom or discipline,” he said.

Spending and Tax Cuts

Obama, who takes office on Jan. 20, is proposing a two- year stimulus proposal that includes infrastructure spending aimed at creating or saving 3 million jobs and about $300 billion in tax cuts for individuals and businesses.

The president-elect didn’t put a price tag on his plan, though he has said it will widen the federal budget deficit, which the Congressional Budget Office yesterday forecast would hit $1.18 trillion this year. Democratic officials have said Obama’s target is a package of about $775 billion.

That would place it at the high end of the range the president-elect’s advisers have been promoting and lower than the $1 trillion stimulus that some economists have called for.

Nobel laureate Joseph Stiglitz said Obama’s plan is “not enough” because it puts too much into tax cuts rather than higher spending.

“Clearly more is going to be needed,” Stiglitz, a professor at Columbia University in New York who advised Obama during the campaign, told reporters at a conference in Paris today. “With a lot of the money going to tax cuts, they won’t have the effect some would hope.”

Congressional Skeptics

A top congressional Democrat also questioned the potential impact of the tax reductions Obama outlined, which would return $500 to individuals and $1,000 to families through changes in withholding.

“I’m very skeptical that’s going to make much difference,” Senate Budget Committee Chairman Kent Conrad of North Dakota told reporters in Washington. “For the average family, it’s going to add $20 a week -- I mean how much lift is that going to give?”

Republican congressional leaders said that while rapid action is needed on the economy, too big a spending package would cost Obama some party members’ votes.

“We have to address the economic crisis, but we also have to address how much debt we’re going to build up,” Senate Minority Leader Mitch McConnell, a Kentucky Republican, said.

Bid for Support

In a bid to gain Republican support, Obama said his plan won’t be “just another public works program” and vowed he “won’t just throw money at our problems.”

He has said the spending would have to be geared toward programs that foster long-term economic growth -- in energy, health care and education.

The speech was short on specific spending proposals. Obama said he would aim to double the production of alternative energy in the next three years, modernize 75 percent of federal buildings, and improve the energy efficiency of two million homes. He also promised that the investments would go toward making all medical records computerized within five years.

As part of infrastructure spending, Obama would expand broadband lines across the country, and he called for a “smart grid” that would allow users and producers of electricity to communicate with an eye toward reducing energy use. Obama said it would “save us money, protect our power sources from blackout or attack, and deliver clean, alternative forms of energy to every corner of our nation.”

Electrical Grid

Such investments could provide a boost to General Electric Co. and Google Inc. The two are working together to develop a so-called smart electrical grid that can make better use of power from renewable sources.

Obama said passage of the stimulus plan alone won’t solve all the country’s ills. He called for a “sweeping effort” to allow people facing foreclosure to stay in their homes, pledged to prevent “catastrophic failures” of banks and promised to overhaul “weak and outdated” financial regulation.

“That’s important,” said Simon Johnson, a former chief economist at the International Monetary Fund who’s now a senior fellow at the Peterson Institute for International Economics in Washington. “The stimulus program on its own is not enough. You have to slow down foreclosures. You have to limit forced sales.”

Johnson said that in discussing help for the banks and homeowners, Obama was foreshadowing what he intends to do with the remaining $350 billion of the $700 billion bank bailout fund approved by Congress in October.

Lobbying Lawmakers

The president-elect has spent the bulk of his first full week in Washington since the Nov. 4 election meeting with advisers and congressional leaders to help craft the package and shore up support. While Obama was giving the address, senior adviser David Axelrod was meeting with House Democratic leaders.

Obama said he wants the plan “passed in the next few weeks.” House Speaker Nancy Pelosi said today she is determined to get legislation to Obama for his signature before a weeklong congressional recess that is scheduled to begin Feb. 16. She said she will keep lawmakers in Washington if necessary.

“We can’t go home without an economic-recovery package, and we won’t,” Pelosi said.

Under pressure from lawmakers in both parties to ensure strong oversight of how the stimulus money is spent, Obama is taking steps to reassure lawmakers and voters.

Measuring Performance

Yesterday he named Nancy Killefer, a director at management-consulting firm McKinsey & Co. and formerly an assistant Treasury secretary in the Clinton administration, to the new post of chief performance officer. She is charged with making the government more accountable for the money it spends.

He said the public will be able to use the Internet to view information about where the stimulus money is being spent and has promised to create an economic-recovery oversight board. He will also bar lawmakers from inserting pet spending projects, known as earmarks, into the legislation.

To contact the reporters on this story: Julianna Goldman in Washington at jgoldman6@bloomberg.net; Rich Miller in Washington at rmiller28@bloomberg.net

Last Updated: January 8, 2009 14:44 EST