Fighting Off DepressionBy PAUL KRUGMAN
Published: January 4, 2009
“If we don’t act swiftly and boldly,” declared President-elect Barack Obama in his latest weekly address, “we could see a much deeper economic downturn that could lead to double-digit unemployment.” If you ask me, he was understating the case.
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It turns out, however, that preventing depressions isn’t that easy after all. Under Mr. Bernanke’s leadership, the Fed has been supplying liquidity like an engine crew trying to put out a five-alarm fire, and the money supply has been rising rapidly. Yet credit remains scarce, and the economy is still in free fall.
Friedman’s claim that monetary policy could have prevented the Great Depression was an attempt to refute the analysis of John Maynard Keynes, who argued that monetary policy is ineffective under depression conditions and that fiscal policy — large-scale deficit spending by the government — is needed to fight mass unemployment.
The failure of monetary policy in the current crisis shows that Keynes had it right the first time. And Keynesian thinking lies behind Mr. Obama’s plans to rescue the economy.But these plans may turn out to be a hard sell.
News reports say that Democrats hope to pass an economic plan with broad bipartisan support. Good luck with that.
In reality, the political posturing has already started, with Republican leaders setting up roadblocks to stimulus legislation while posing as the champions of careful Congressional deliberation — which is pretty rich considering their party’s behavior over the past eight years.
More broadly, after decades of declaring that government is the problem, not the solution, not to mention reviling both Keynesian economics and the New Deal, most Republicans aren’t going to accept the need for a big-spending, F.D.R.-type solution to the economic crisis.
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http://www.nytimes.com/2009/01/05/opinion/05krugman.html The reason that Obama's tax cut plan is so large, 300 Billion dollars, is partly because it is an offer that the Republicans will not be able to refuse.
In order to keep Deflation at bay, the tax cuts will be provided incrementally via reducing the income tax deducted from payroll checks. That way, there is no lump sum to "save" as was the reason given why Bush's tax rebates were ineffective. Instead, the money will be injected into the economy on a daily basis as people get their checks, and there will be an additional 450 billion that will go into infrastructure projects, Green Technology, and health care modernization. The tax cuts are not aimed at the wealthy or corporation, rather they are aimed at middle class and lower wage earners and small businesses.
See a more detailed article on the NEW Tax Cut Proposal here: http://www.democraticunderground.com/discuss/duboard.php?az=view_all&address=102x3672648
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