Paul Krugman says "it's easy":
The depression we’re in is essentially gratuitous: we don’t need to
be suffering so much pain and destroying so many lives. We could end it
both more easily and more quickly than anyone imagines — anyone, that is,
except those who have actually studied the economics of depressed
economies and the historical evidence on how policies work in such
economies.
The truth is that recovery would be almost ridiculously
easy to achieve: all we need is to reverse the austerity policies of
the past couple of years and temporarily boost spending. Never mind all
the talk of how we have a long-run problem that can’t have a short-run
solution—this may sound sophisticated, but it isn’t. With a boost in
spending, we could be back to more or less full employment faster than
anyone imagines.
But don’t we have to worry about long-run budget
deficits? Keynes wrote that “the boom, not the slump, is the time for
austerity.” Now, as I argue in my forthcoming book—and
show later in the data discussed in this article—is the time for the
government to spend more until the private sector is ready to carry the
economy forward again. At that point, the US would be in a far better
position to deal with deficits, entitlements, and the costs of financing
them.
Meanwhile, the strong measures that would all go a long way
toward lifting us out of this depression should include, among other
policies, increased federal aid to state and local governments, which
would restore the jobs of many public employees; a more aggressive
approach by the Federal Reserve to quantitative easing (that is,
purchasing bonds in an attempt to reduce long-term interest rates); and
less timid efforts by the Obama administration to reduce homeowner debt...
The politics of achieving that? Okay, that's more difficult. Krugman discusses the evidence for his argument and the obstacles to achieving rational policy to end what he forthrightly calls "this depression" at length in
his current New York Review of Books article, HERE.
