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Stimulus: Can it work like Roosevelt's New Deal?

Why government spending plus easy money could pull US out of recession by year's end.

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There's an old saying by economists that once the Federal Reserve gets short-term interest rates down to zero, it can't "push on a string." In other words, the nation's central bank can't do much more to revive the economy from its present financial and economic slump because it can't lower interest rates further. They are now almost zero.

Paul Kasriel, an economist with the Northern Trust Co., in Chicago, has a different string theory. He figures the Fed has been, in effect, printing so much money, regardless of interest rates, that in combination with a massive fiscal stimulus package, the economy should revive by late this year or in 2010. "It depends on how fast the government can shovel out the [stimulus] money," says Mr. Kasriel.

During the Great Depression, it was similarly a combination of major government spending (the New Deal) and easier money that eventually brought a vigorous recovery.

So today, the Fed must in reality finance much of the $787 billion stimulus package or the stimulus won't work, Kasriel says. Without the Fed's support, the nation's actions could be likened to someone spending stimulus money at a store with one hand and taking money out of the store's cash register with the other (via tax hikes or spending cuts).

Certainly Fed policymakers have been pouring gobs of money into the economy. Last year, bank reserves grew almost 149 percent. That's "an unprecedented increase," Kasriel notes.

"Never underestimate the initial positive impact on aggregate demand of that powerful combination of increased federal government spending, tax cuts, and a central bank running the monetary printing press at a high speed," he adds.

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