(note: this was originally written as a response to someone in the comments of a front page diary stating that we shouldn't pass the stimulus and should focus on other ways to respond... it grew to what this became and so I decided it would probably serve as a decent diary)
The idea of a stimulus is a great one. Instead of trying to distribute the wealth we have (tax cuts), the stimulus idea is to build a better wealth creation engine. There are several great examples of how this works in recent American history (by recent I mean in the scale of human history).
- The Rail Boom in the late 1800s. After the Civil war, there was a rail bubble. Rail was the next big thing, all you had to do was lay tracks and put a train on it and you'd make tons of money! Or so investors thought, but since everyone jumped in at once what ended up happening was that there was too much competition, and the resulting price war bankrupted basically everyone. Then a few rich investors came to the fire sale and bought up all the rail, and suddenly there was enough capacity that it became practical to ship cargo all over the country for super cheap, including things like sending Texas beef back east for New England butchers. The huge amount of money that began heading west made a lot of cattlemen rich, and so they started wanting higher priced items that were being manufactured in the factories in the east. The resulting trade loops from that and similar buisiness created a huge wealth boom that was further enhanced by gold rushers. All the economic activity wouldn't have been possible without cheap rail.
- The manufacturing boom and the per-capita increase in productivity due to WW1 and 2 industrialization (mostly from WW2). Again we have a huge outlay in spending, although in this case it came in the form of New Deal programs which were making a big difference, but were discontinued due to political pressure. Then, just in the nick of time we have WW2 and a huge expansion in our industrial base as massive orders for every concievable good come in from the government (food, clothing, tanks, planes, guns, beds, shoes, everything you could imagine). The other big deal was the introduction of women into the industrial side of the workforce. This alone would have had a massive stimulus effect on the economy because the old role of woman as housewife, while often involving hard work and thankless toil, was not a great wealth generator. By putting workers who were previously only providing stimulus through consumption (consumption that wouldn't be decreased by moving their work from the home to the factory or, eventually, office) into an area with productivity, you increased the efficiency of the American population (and struck a blow for equality in the bargain). The WW2 industrial base would, after the war, be converted for domestic production, allowing for the lifestyle of the 50s and 60s. Things like the GI Bill and the conversion of munitions plants into fertilizer plants (which basically just means they started putting the munitions on the plants, explosives are great fertilizers) allowed for even more stimulus. Things did pretty good for a while.
- The dot com era. This is a good recent example. While everyone was going crazy with the dot coms, the telecoms were hard at work. They looked at all the dot com money and realized that if they wanted a piece of that pie, they would have to ramp up capacity to handle the age of internet commerce. Companies like Worldcom started putting fiber optic cable in the ground at an astonishing rate. They bulit it, but Kevin Costner had lied to them: no one came. Many of these companies went out of business, but the fiber they had put down was still in the ground and was bought at fire sale prices (this is a very strong paralell to the first example, except instead of huge excess rail capacity we had huge excess network capacity). Even now huge amounts of this fiber cable is "dark," unused because the fiber optic cable can carry more data than you can possible imagine. Once the bargain hunters bought up the cable, they realized they could offer bandwidth for super cheap, and so it suddenly became economical to do things like host streaming video for free off an ad-supported model or to put broadband in every home. This led to a huge boom in internet-enabled activity which continues to this day (though the ad supported models of many internet companies are currently under threat).
These are just a few examples, mostly off the top of my head, to give you an idea of the kind of spending we need. We need to lay down money that creates capacity for business models to thrive by making things that are currently too expensive (either though time, money, or effort) to be profitable. This means building infrastructure, educating people, job retraining, and keeping people fed and healthy. Education, food stamps, road and bridge repair, airport renovation, and those kinds of activity is the kind of thing that is going to give us a boom time, and they're the kinds of things that help in the short term (as jobs are created to perform the tasks related to construction etc) and in the long term, as the roads will still be there, the people will still be educated, and the poverty stricken won't be dealing with the permanent debilitating effects that happen when one goes hungry or is forced to let a health condition that would have been easily treatable early is allowed to fester and become a serious problem.
We can act now and make things better by spending a little in the short term to see signifigant rewards in the long term, or we can let the Republicans shoot us in the head and dry hump our corpses. It's up to us.