Gfranc,

Keynesian models like the IS-LM model are more credible than their competitors at this point because they predicted a protracted recovery while others suggested (working from different assumptions) that no stimulus was needed because inflation was just around the corner or claimed that stimulus was fiscal suicide because the United States is facing a debt crisis.

Inflation - of course - has not been just around the corner despite an unprecedented increase in the money supply. And there has been no debt crisis: the cost of borrowing has actually fallen for the the United States with thirty year Treasury bonds priced at about 1 percent per year. This is a great time to be the US government since assuming there is a way to invest that money to grow the economy at more than 1 percent per year, it is essentially free money.

You confuse fiscal and monetary policy when you talk about the implications for US government debt. Theoretically, there is no debt problem from monetary policy since the money is created out of thin air through leverage by the banking industry and can be destroyed again as quickly as it is created by raising interest rates or reversing open market operations. The possible consequences of increasing the money supply are: (1) inflation happens as more money is pumped into the economy and chases the same number of goods, or (2) the value of the US currency drops internationally as the supply of dollars for sale increases. The thing to remember is that in neither of these cases will problems happen while the economy remains in depression. Inflation is a sign that the economy is at or close to full production. A devalued currency would likewise stimulate exports and reduce the trade deficit with other countries like China, promoting growth and full employment in the process.

People like Krugman are complaining because they don't see the US using either monetary or fiscal policy to seriously address the unemployment crisis. Krugman is angry with monetary policy because the bailout of the financial sector is following the "Japanese" model: banks are not being forced to realize their losses but are instead forcing the government into an endless loop of subsidization while using the funds not to strengthen their balance sheets so much as engage in the sorts of arbitrage that do not create jobs or promote recovery. If you consider yourself capitalist or believe that business should not be dependent on the government you should agree with him.

Krugman also advocates stronger fiscal policy since it is needed. Despite what you may think, it is worth remembering that government spending has FALLEN since 2008 (see: http://www.economist.com/blogs/freeexchange/2011/09/fiscal-p...). This is tragic for the employment prospects of your niece since the costs of creating an economy that can employ her are - as pointed out above - practically non-existent. The long-term carrying costs of another 500 billion in fiscal stimulus is around 200 billion, while that amount of spending would increase GDP somewhere between 1 and 1.5 trillion USD. That would create a lot of jobs. If these jobs were financed by issuing more 30 year Treasury Bonds, the cost would total 270 billion in 2042 when they would need to be paid back. And if that seems like a lot of money, remember that the government is paying banks tens of billions more EACH YEAR simply by lending them money at low interest rates and then borrowing it back at higher rates of interest. The fact that the country gets very little boost to GDP for the absurd dance should bother you.

As for the rest, I agree there are underlying cultural problems with expectations of entitlement. But it doesn't seem terribly hypocritical for your niece to expect a free ride, especially if the reason she can't get a job is because the banks won't write off their losses, and are instead reliant on government subsidies for their profitability when that money would be better spent on improving the health, welfare and education of US citizens.