As we listen tonight to Pres. Obama and the conservative response, we need to keep in mind that there are basically three schools of thought. As voters we have to decide which one conforms to reality and which one is fantasy.
1) The Keynesian Solution
Keynesian economics was used by New Deal policy makers and during the period immediately following WWII. They believed that consumer spending drives economic growth. As a result, the government, in times of recession, should put money in the hands of consumers. This is done with unemployment benefits, food stamps and housing assistance. It is also done by jobs programs, either direct infrastructure projects or indirect hiring of state workers. The government borrows at low interest rates from private individuals who are too scared to invest in a troubled economy. In other words the government uses "fiscal policy" to put idle capital to work.
2) The Monetarists.
The monetarists were inspired by Milton Friedman. He argued that increased lending was the key to getting the economy moving again. Central banks should increase the money supply by lowering interests rates and buying assets from banks. Today, the term used is quantitative easing. The Federal Reserve has been buying treasury bonds from the big banks. This direct infusion of capital was designed to make credit easy. Easy credit would spur growth.
3) The Supply-Siders
The supply-siders believe that supply creates demand. Supply, or businesses, depend on investments. The goal then is to ease the burdens of the investor or rentier class. Translating this into into public policy requires lowering business taxes and deregulation. One deregulation goal in particular is their crown jewel--eliminating the minimum wage. Wages and benefits MUST fall before businesses start hiring. These policies would lower the expenses required to produce a supply. With increased supply, the economy will grow.
Under normal circumstances, monetary tools and the social safety net are good enough to stabilize an economy. Under extraordinary circumstances, like a global financial melt down, only large amounts of government borrowing and spending has been proven to work. By most accounts the Federal Reserve has reached its limit. The supply side theory is completely discredited. What good is a large supply if there are not consumers? Driving down wages and benefits will only makes things worse. While President Obama's proposals will likely be too small and largely symbolic, the conservative alternative is economic suicide.