Try the Tax cuts prescription

Mankiw has a nice article on US economy issues and suggestions for Obama

He says the situation is similar to the one facing a doctor:

IMAGINE you are a physician and a patient arrives in your office with a troubling and mysterious disease. Some of the symptoms are familiar, but others are not. You have never treated anyone with quite this set of problems.

Based on your training and experience, imperfect as it is, you come up with a proposed remedy. The patient leaves with a prescription in hand. You hope and pray that it works.

A week later, however, the patient comes back and the symptoms are, in some ways, worse. What do you do now? You have three options:

STAY THE COURSE Perhaps the patient was sicker than you thought, and it will take longer for your remedy to kick in.

UP THE DOSAGE Perhaps the remedy was right but the quantity was wrong. The patient might need more medicine.

RETHINK THE REMEDY Perhaps the treatment you prescribed wasn’t right after all. Maybe a different mixture of medicines would work better.

This is also the problem faced by Obama team. He passed a stimulus to save the economy in Jan 2009 and to lower unemployment. But unemployment continued to rise and is now at 10%.

So what should Obama do? Mankiw says he should opt for choice 3 and go for tax cuts. He points to a couple of studies which are suggesting the same.

Fiscal Multiplier debate to continue….

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