The recovery was mainly due to the following factors:—

(i) the solution of the credit and insolvency problems, and the establishment of easy short-term money;
(ii)the creation of an adequate system of relief for the unemployed;
(iii) the public works and other investments aided by Government funds or guarantees;
(iv) investment in the instrumental goods required to supply the increased demand for consumption goods[.]
(v)the momentum of the recovery thus initiated.

Now of these (i) was a prior condition of recovery, since it is no use creating a demand for credit, if there is no supply. But an increased supply will not of itself generate an adequate demand. The influence of (ii) evaporates as employment increases, so that there is a dead point beyond which this factor cannot carry the economic system. Recourse to (iii) has been greatly curtailed in the past year. (iv) and (v) are functions of the upward movement and cease—indeed (v) is reversed—as soon as the position fails to improve further. The benefit from the momentum of recovery as such is at the same time the most important and the most dangerous factor in the upward movement. It requires for its continuance, not merely the maintenance of recovery, but always further recovery. Thus it always flatters the early stages and steps from under just when support is most needed. It was largely, I think, a failure to allow for this which caused the ‘error of optimism’ last year.

Krugman writes about the importance of fiscal stimulus today:

As Brad DeLong argues, there’s a very good case to be made that we’re currently living under conditions in which fiscal contraction actually worsens the long-run deficit. Why? The argument runs like this:

1. Fiscal contraction reduces output in the short run; this immediately means that part of the initial gain in terms of a lower deficit is offset by reduced revenue and higher safety-net spending. These effects are especially large when you’re in a liquidity trap, so monetary policy can’t fight the fiscal contraction.

2. Reductions in short-run output and employment take a toll on long-run growth, too: capital investment is depressed, workers lose their skills, and so on. This in turn reduces future revenues.

3. Meanwhile, with real interest rates very low — actually negative on 5-year bonds — the cost of borrowing now in terms of future debt burden is also very low.

So there is no plausible argument on behalf of the claim that fiscal contraction expands output; there is, on the other hand, a very plausible argument to the effect that fiscal contraction doesn’t even help the fiscal situation.

President Obama has unlearned the lesson of 1938. But there is no reason the Dems in Congress should follow him over that cliff.

Otherwise, we can all play John Maynard Keynes:

Unless, therefore, the above factors were supplemented by others in due course, the present slump could have been predicted with absolute certainty. It is true that the existing policies will prevent the slump from proceeding to such a disastrous degree as last time. But they will not by themselves—at any rate, not without a large-scale recourse to (iii)—maintain prosperity at a reasonable level.

Speaking for me only