Must-Read: 1. Paul Krugman is right... 2. If you think Paul Krugman is wrong, see #1...: Paul Krugman (2009): The Obama Gaps: "The bottom line is that the Obama plan is unlikely to close more than half of the looming output gap, and could easily end up doing less than a third of the job...
...Why isn’t Mr. Obama trying to do more? Is the plan being limited by fear of debt? There are dangers associated with large-scale government borrowing.... But it would be even more dangerous to fall short in rescuing the economy. The president-elect spoke eloquently and accurately on Thursday about the consequences of failing to act—there’s a real risk that we’ll slide into a prolonged, Japanese-style deflationary trap—but the consequences of failing to act adequately aren’t much better.
Is the plan being limited by a lack of spending opportunities? There are only a limited number of “shovel-ready” public investment projects.... But there are other forms of public spending, especially on health care, that could do good while aiding the economy in its hour of need. Or is the plan being limited by political caution?... Keep the... price... below the politically sensitive trillion-dollar mark... inclusion of large business tax cuts, which add to its cost but will do little for the economy... [as] an attempt to win Republican votes in Congress.
Whatever the explanation, the Obama plan just doesn’t look adequate to the economy’s need. To be sure, a third of a loaf is better than none. But right now we seem to be facing two major economic gaps: the gap between the economy’s potential and its likely performance, and the gap between Mr. Obama’s stern economic rhetoric and his somewhat disappointing economic plan.