It’s becoming ever more clear that something really big is happening to the U.S. economy.  Living in Washington, DC, I don’t personally see it.  People still fill restaurants and come and go to work as normal.  Except for the incredible sales prices I see in most stores and my bank statements that show gigantic shrinkage in my net worth, I’d have no real inkling that anything bad is happening out there.  Washington, you see, is somewhat insulated from the real America thanks to the federal government that does not, like state government, cut back on employees as deficits grow.  It is newspapers both in their business coverage and general coverage that keep me informed on the reality of the economic crisis.

Since the crisis began I’ve being trying to post links to some of the better stories and commentary I’ve been reading and I will continue to do so.  Today’s New York Times offers two stories that I found very useful.  The first is informative in revealing that even policy makers at the Federal Reserve Board in its December meeting “appeared almost stunned by an economy that was sinking faster than they had expected on almost ever front in December”.  The story is entitled In Fed Rate Cut, Fears of Long Recession

Also highly informative today is New York Times reporting on the annual meeting of the American Economic Association in San Francisco.  The story is entitled Economists Warm to Government Spending but Debate Its Form.  I’ve noted before that when I studied economics in university in the 1970s I was taught that Keynesian economics was, more or less, a thing of the past.  It was monetary policy that would keep us on the straight and narrow from now in.  Not so fast it seems.  Among other things, this article helps to explain why Keynesian economics has its role in the government toolkit after all.  This article explains well why monetary policy isn’t working this time around and why a fiscal stimulus is deemed necessary by most economists, including many conservative ones.  Here’s an excerpt from the story:

No one illustrated the conversion to fiscal stimulus more vividly than Martin Feldstein, a Harvard economist and a well-known conservative who served for a time as a top economic adviser to President Reagan. In a paper, Mr. Feldstein noted that the usual method of reviving the economy — lower interest rates — was failing to work because of “a dysfunctional credit market.”

That left fiscal stimulus to offset what he described as a decline of $400 billion a year in consumer spending. “While good tax policy can contribute to ending the recession, the heavy lifting will have to be done by increased government spending,” Mr. Feldstein said.

He pushed for big spending, carried out quickly. Among his proposals: replace depleted military supplies and equipment and step up financing for “useful research.” He also said that the shortage of “shovel ready” projects should not be a deterrent in a recession that is likely to last long enough to plan and execute new projects.

“It is of course possible that the planned surge in government spending will fail,” Mr. Feldstein said. But he expressed the “hope that the new program of fiscal spending in combination with mortgage market reforms will be sufficient to return the economy to full employment.”  

Give the article a read.  It also contains some good (and not so good) ideas for stimulus expenditure.  The bottom line is that the country must act expeditiously if we are to head off a more serious crisis and, what Paul Krugman yesterday called, Great Depression II. 

It also appears most fortuitous that the country has new leadership just in time to make this monumental economic policy.  I, for one, would certainly not have the same confidence in President Bush as I do right now in President-elect Obama and the team he’s assembled.  Although I can find little fault with President Bush’s post-crisis decision-making, I am comforted that we have new leadership at the helm just in time to take this next big step.  Let us hope we as a country indeed made the right decision in November and our confidence is not misplaced.