Given the risks, it'd be wiser to let economic nature take its course.
President-elect Barack Obama has promised to jolt the American economy out of its depressionary spiral with the mother of all fiscal stimuli. While Mr. Obama seems to have little choice in this policy matter, his desperate gambit has a high probability of failure – and may make the recession worse. Don't believe the Washington chorus: We spend our way to economic recovery.
Though politically unpalatable, the wiser approach would be to let economic nature take its course. Such tough love, while painful, is the surest way to a healthy recovery in both jobs and asset prices.
Obama's choices are very limited, in part because US monetary policy is broken. The US economy has reached a critical recessionary point where any additional interest-rate cuts will do little to coax reluctant investors back into the game. Rates are already close to zero, so there's not much left to cut in any case. That leaves only fiscal policy.
Like any economy, America's gross domestic product (GDP) is driven by four elements: consumption, business investment, exports, and government spending. The first three elements are in free fall. That leaves the government as the "spender of last resort."
Obama is betting heavily that massive government spending will create millions of new jobs. Still, it must be asked: Why does Obama prefer a fiscal policy geared toward increased spending rather than the tax cuts he promised ad nauseam during his campaign?
The answer is painfully simple – and illustrates the Bush-crafted box Obama finds himself in. Beleaguered consumers would probably not spend any new tax cuts but rather pay off debts – or stuff them under the figurative mattress.