By Ben Cohen
Krugman warns that the stimulus must continue, despite the Right's calls to reign in spending:
The first example of policy
in a liquidity trap comes from the 1930s. The U.S. economy grew rapidly
from 1933 to 1937, helped along by New Deal policies. America, however,
remained well short of full employment.
Yet policy makers
stopped worrying about depression and started worrying about inflation.
The Federal Reserve tightened monetary policy, while F.D.R. tried to
balance the federal budget. Sure enough, the economy slumped again, and
full recovery had to wait for World War II.
The second example is
Japan in the 1990s. After slumping early in the decade, Japan
experienced a partial recovery, with the economy growing almost 3
percent in 1996. Policy makers responded by shifting their focus to the
budget deficit, raising taxes and cutting spending. Japan proceeded to
slide back into recession.
And here we go again.