On deficit spending and the need for boldness in addressing our economic woes:

Jamie Galbraith responds to the question posed by the National Journal, "Is the deficit a threat to future recovery?"

James K. Galbraith, National Journal: No. The question is grossly misconceived. Right now and for the immediate future, the budget deficit is the only source of demand that can fuel a recovery. Our present problem is not that it is too big, but that it is too small. Far too small.

Go read the rest [Mark Thoma's summary at Economist's View, which links the original], which substantially echoes the words of Paul Krugman I quoted here. For example:

[T]he entire private sector, across the entire country and indeed the world, is pulling the economy downward at the present time. ... [A]s consumption, investment and exports decline, so will tax revenues. The government budget deficit is destined to rise, by a lot, on this account alone. This is helpful: a falling tax burden in a progressive tax structure keeps money in private pockets. But it is a weak device to promote expansion, since tax savings will be used first to try to pay down debt... A major tax cut, focused on working Americans such as by remitting the payroll tax, would help sustain after-tax incomes and provide funds to pay mortgages and buy cars. But even these effects are uncertain in a debt deflation.

In these conditions, only government spending can pull the economy out of the ditch. Government must spend. It must do so by as much as necessary in order to maintain a high level of employment. Aid to states and localities, an infrastructure fund, increased social security benefits, foreclosure relief, loans or grants to industry, a green jobs program -- all can be useful in coping with the crisis. All will, of course, add to the public budget deficit.

There is no harm in seeking out wasteful or unnecessary programs to cut as the President-elect proposes. The war in Iraq is a huge waste of money with minor benefits to employment. Missile defense is a vast waste of construction, engineering and scientific resources with no benefit to security. Bridges to nowhere and roads to the wilderness add nothing to the value of the national capital stock. But the point of cutting waste and boondoggles is not to reduce the deficit, but to release real resources for better uses. The obligation to use those resources, and to deploy the public funds necessary to ensure that they are used, remains.

An important comment Galbraith makes in arguing (as did Krugman) against the notion that deficit spending would "crowd out" private investment:

Whether they know it or not, those who argue a "crowding out" model are working from a mental construct under which the economy is always operating at or near full employment, and under which there is a fixed supply of credit resources, a pool which government and the private sector must share. This is not the case! We are far below full use of available resources now and will certainly fall very much farther in the months ahead... And there is no fixed pool of credit! The entire purpose of the capitalist banking system under the Federal Reserve Act, ever since 1913, has been to create an "elastic currency" not subject to fixed limits to the supply of finance. With due respect to those who continue to have reservations about "crowding out", please stop. This is a moment when an unfamiliarity with the most basic economic and financial facts can be very dangerous to national well-being.

[My emphasis]

See also, Stiglitz, Roubini, and Krugman (again).

This is no time for half-measures.