Finding wisdom on the question of economic stimulus may be Washington's most important task in generations -- short of major war decisions. President Barack Obama currently is proposing to spend about $850 billion over two years that he asserts is intended to stimulate the economy and thereby add 3-4 million jobs that otherwise would not exist.
It is generally expected that Obama is lowballing it and that after Congress is finished, the level will be closer to $1.2 trillion. Without such efforts, it is asserted, we would face something on the dimensions of the Great Depression (during which America endured up to 24 percent unemployment and up to 13 percent contraction of gross domestic product in a single year). With the stimulus and other legislative and executive actions, people close to Obama hope that unemployment would top out at less than 10 percent and GDP contraction at about 5 percent. 
Rarely has so much hung on contested economic theories and ambiguous historical references. The first question is whether fiscal stimulus can ameliorate an economic contraction. Interestingly, Obama's chief economist, Christina Romer, according to The New York Times, "concluded in research she helped write in 1994 that interest-rate policy is the most powerful force in economic recoveries and that fiscal stimulus generally acts too slowly to be of much help in pulling the economy out of recessions."
Although she now supports Obama's stimulus, many economists fear that by the time a stimulus comes online, the economy already will be recovering and all the stimulus will do is induce inflation. With trillion-dollar deficits and huge expansions of the money supply by the Federal Reserve, the prospect of double-digit or worse inflation in a year or two is a real danger to consider.
On the other hand, even many important conservative, free market economists -- including some of former President Ronald Reagan's top economists -- believe we do need a very big fiscal stimulus a la what we had in the 1930s and '40s. And here is where it gets even more confounding. Maybe a trillion-dollar deficit is too small. Most economic historians believe that the Great Depression did not end until World War II because only then was the deficit spending big enough to fully replace the lack of private-sector economic activity. FDR was afraid of big deficits and didn't spend enough to end the Depression sooner.
If that theory is right, consider that during WWII, the deficit as a percentage of GDP was: 1943 -- 30 percent; 1944 -- 23 percent; 1945 -- 22 percent. A trillion-dollar deficit in 2009 would be only 8.3 percent of the GDP, although it would be bigger than the previous biggest deficit since WWII -- 6 percent in 1983.
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