Quote from oraclewizard77:
The most common approach to measuring and quantifying GDP is the expenditure method:
GDP = consumption + gross investment + government spending + (exports − imports), or,
GDP = C + I + G + (X − M).
C is down due to house prices falling and credit cards being maxed out.
I is down due to in part to C being down ie inferred logic.
So increasing G does in this case bring about an increase of GDP vs doing nothing.
We don't want to increase G when the economy is doing well since that crowds out normal I which will not be able to compete for the same goods and services as the government is able by paying an above market price.
Other considerations:
1) The US dollar is actually up vs the other world currencies making it less expensive to import consumables and also now a better return on investment for say China than investing in either the GBP or the EURO which have been tanking.
2) $ being up is good for China to allow them to keep their people employed making products for the USA.
3) China gets $ when selling products to the USA.
So all things being equal, spending more money to stimulate the economy is the best response from the government. I actually think they should increase spending by another $ 1 trillion to be spent on repairing the roads, etc in a green way as possible including incentives to buy and build green cars.
The problem with Japan is that they have a shrinking population base and did not actually clean up the assets in their banks like the administration hopefully will try to do or is trying.
The logic is correct mathematically, but flawed in the real world.
In the real world, you'd want to send the dollars to where it will be spent on productive pursuits. Unfortunately, governments can't do that, because the inert places, which, because of the inevitable compromises that come with a nation-state (in the US, that each state has two Senators, regardless of its population, and the Electoral College, which magnifies the effect of this) always have a disproportionate say in the national debate, will stop any attempt to target the money to the successful places.
So, a large part of the government money will be wasted.
On top of that, restoring confidence is the real key. What Keynes didn't realize is that the savings trap is a direct result of a loss of confidence. Restore confidence, and you get out of the savings trap.
JP Morgan said it best. Asked on what basis he lent out money, he said "Character." What that means, quite simply, is that you direct your money to where you are as confident as you can be that you will make your investment back, and then some.
From time to time, that confidence is lost throughout society, because of some bubble that when it bursts, causes mass privation. Restore that confidence, and you restore the economy. This is what Keynes missed, and what Obama, following Keynes, is also missing.
