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http://www.npr.org/templates/story/story.php?storyId=88156284

http://en.wikipedia.org/wiki/List_of_countries_by_public_debt

Krugman states: "When monetary policy is up against the zero bound, the optimal fiscal policy is to expand government purchases enough to maintain full employment."

However, he ignores the lesson from Japan's Lost Decade (article):

"Don't try to spend your way out of an economic trough. Japan ramped up government spending on public works projects, including bridges and river "improvement" programs that literally lined many waterways with cement. But it didn't work, and today the only evidence of this spending binge is the ugly slabs of cement that mar the Japanese countryside."

My comment: Today, Japan still hasn't completely recovered from the 1990 bust and has the second highest debt to GDP ratio in the world (Zimbabwe is first). Consequently, Japan is severely constrained.

The data show large tax cuts had powerful and immediate positive effects on GDP (under Kennedy, Reagan, and Bush II twice). A large tax cut was needed (rather than a $13 a week reduction in withholdings and tax credits a year out), because of high household debt.

A $700 billion tax cut (or up to $5,000 for 150 million workers) with the $700 billion in TARP late last year would've likely resulted in a shallow recession and a stronger recovery. Taxes could have been raised when the recovery was underway.

Some say that would've been risky. However, what's risky about giving workers some of their own money back?, particularly when they most need it.

There have been many fiscal policy mistakes over the past year. However, they can be corrected.

A lot of production has been shut-down and scaled-back, which is why unemployment has soared. Consequently, if demand picks-up strongly, inflation should accelerate. If demand doesn't pick-up strongly, it will be chiefly from the inefficiencies created by government spending.

To promote strong economic growth, the government needs to reduce tax withholdings, perhaps by freezing the income tax for some time. Also, it needs to rescind much of the $787 billion stimulus bill and $410 billion omnibus bill. Moreover, it has to cancel the cap and trade tax, and other energy taxes, to lower energy costs. Furthermore, it needs to forget about its $1 trillion in health care reform (which may turn out to be $3 trillion), and begin reforming its past reforms to lower health care costs.

The government should find ways to actually save money to refund American taxpayers. Tax cuts will accelerate the expansion, eventually taking the slack out of the economy, and achieve full employment, which will increase government tax revenues. The combination of greater tax revenues and reduced spending will shrink budget deficits quickly. Taxes can be raised when the output gap closes to further shrink budget deficits.

Monetary policy will preempt inflation, and maintain sustainable growth, by absorbing dollars (including the $300 billion it's spending on U.S. government bonds, and the $750 billion it's spending on mortgage backed securities).

Krugman believes his biased political views, which promote incorrect policy responses, are more important than the economics, which reveal correct policy responses.

Krugman's policy suggestions have nothing to do with reality.

His two paragraph statement above was written on December 29th, 2008-"Optimal fiscal policy in a liquidity trap (ultra-wonkish)" Krugman stated: "When monetary policy is up against the zero bound, the optimal fiscal policy is to expand government purchases enough to maintain full employment."

It really should be expansionary fiscal policy instead of "expand government purchases." Fiscal policy reflects allocations of taxes and government expenditures.

Many NeoKeynesian models begin with a biased conclusion and then chooses theories to support it in a narrow framework. I think, a better methodology is to ask why something exists or make an assumption and use many orthodox theories (including partial equilibrium models, input-output models, contemporous models, optimization models, etc., along with the data, to explain or support it. Moreover, I may add, attempts to pass a partial equilibrium model as a general equilibrium model is why NeoKeynesian models have largely failed.

China has benefited from the implosion of the U.S. economy. When the U.S. was expanding at trend growth, which was optimal, China was overproducing by a large margin, which was suboptimal. Now, the U.S. economy is underproducing by a large margin, while China is producing closer to an optimal rate.

Obama wants China to buy more U.S. goods. It seems, Obama is determined to make Americans work harder and longer for fewer and smaller assets and goods. If China wants to exchange its goods for worth less U.S. paper assets, why should the U.S. stop it?