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What can the Federal government do to improve the economy?

Most economists believe that "discretionary fiscal stimulus" (e.g., tax cuts or spending increases by Congress) doesn't do much to stimulate economic growth and shorten the typical garden variety, post-WWII recession (and may be counterproductive).

Monetary policy works better for recessions -- monetary policy is controlled by the Federal Reserve. In fact, the Federal Reserve has pursued a policy over the past year of aggressively driving down long-term interest rates. This action in turn has encouraged Americans to refinance their homes at lower rates, resulting in a lower monthly payment and even substantial available cash (as individuals have taken out some home equity as cash) -- thus putting more money in people's pockets to spend. Americans have used this "found" money to buy goods and services (such as new cars, which also benefit from the cheaper price of money due to low interest rates), which has kept GDP positive -- two-thirds of GDP is goods and services sold to consumers. (We'll overlook for the moment the potential for blow back.)

But the immediate question is whether the standard critique of discretionary fiscal stimulus was right for the typical post-war recession, but doesn't apply to a prolonged period of weak economic activity due to "post-bubble" dynamics of weakening household and business demand for goods and services -- such as we may be seeing now.

If so, are discretionary fiscal actions appropriate, and if so, what specific proposals to cut taxes or increase spending would keep the economy moving?

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