I'm usually outspoken against obvious non-hacker news on this site. I'm being a hypocrite because I've been looking to write up a folksy 'leaves on the fire' economic analogy for a while and this presented a good opportunity.

    Although, honesty, it doesn't have to be things we all need.
    They could hire people to do anything. This is why inspecting
    the stimulus money for waste is so ridiculous - waste is
    perfectly fine, the important thing is to get the money into
    circulation so that the economy can get back on track.

The madness begins. You could hire people to throw bricks through the windows of rich people. And - indeed - you will get the economy moving. Once, perhaps more than once. But people have memories, and your ability to pull this trick declines every time you use it. The actions the government has on the economy change the way that it responds to stimulus for subsequent events. When Keynes wrote his stuff it was like putting leaves on the fire. Whoosh! A century on... it's still like putting leaves on the fire.. except the heat has gone and the leaves aren't getting hot enough to light up.

If you print and redistribute money to the unemployed on a means-tested basis, you are directly punishing the people who have accumulated wealth (the purchasing power of their money is eroded) for the benefit of those who didn't (that's why they're able to pass the means-test). Why would rational people expose themselves to economies that do this to them?

    Capitalism seems to go through frustrating cycles of
    booms and busts. [...] The right solution was to take
    their money away. Give it to the poor, who will spend
    it on something useful, like food and clothing.

No, the right solution is for the government to permanently stay out of it, and let it stabilise of its own accord. That way, over the course of time, people learn to moderate their behaviour, and you don't create moral hazard traps all over the place that take the heat out of the fire.

A commenter wrote, "We are in the process of debunking Keynes yet again." Although the stimulus is "Keynsean", it's operating in an environment that is substantially different to that which he knew and wrote about. For this reason, I don't think it's any more valid to use the current situation as a criticism of Keynes any more than as a valid criticism of capitalism.

Another commenter wrote, "In summary - the business cycle is really misnamed. It's the "banking cycle". To stop cyclical unemployment, fix the banks."

The current system does have a very influential banking cycle. However, the perspective of 'business cycle' is preferable to 'banking cycle'. A certain proportion of people overextend themselves. It's an aspect of human nature. You have correction periods where they get pulled up for these errors. It is a more universal perspective. There is an inevitability about the business cycle regardless of government action, whereas the same is not true of a 'banking cycle'. Adjusting banking policy won't change human nature.

A book about recursion effects (i.e. the way a stimulus event will cause the system to respect to the same stimulus event differently in the future) is _The Crash of 2008 and What it Means: The New Paradigm for Financial Markets_ (Soros, 2009). It's not really about the 2008 crash, that's just a cute veneer he's put on it to sell more copies of a book that's really a book about philosophy with a very economic bent.

For a stronger Keynsean defence, read Read _Animal Spirits: How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism_ (Akerlof/Schiller, 2009) for a purist criticism of recent politics and defence of the Bush/Obama stimulus. Though I disagree with the core, the breakdown of 'animal spirits' is useful in its own right, and surely a better lens for viewing what goes in in an economy than 'efficient markets'.

Something that's long-term scary about the current situation is that the political might of nation-state governments has reached a point where private banking is being eliminated globally. In the past it was possible for successful people to look after themselves and generate wealth for the rest - but this is being undermined. The Swiss made the mistake of giving the banks too much backing and have sold out whilst saving the furniture, Luxembourg and Ireland are too European, South Africa is too African, Lietchenstein and Carribean countries are too small, Iceland and the UK are beholden to creditors.

The situation presents a huge opportunity for Chile, Australia and New Zealand. Australia has a gun banking sector already with strong foreign exchange services in at least three centres and would be the strong option. New Zealand cares far less about foreign policy links to the US and has a libertarian party already in parliament. The natural party of government in Chile is the left and they'd be suspicious of private banking but the right are polling well. Chile and Australia have added benefit of metals in the ground. Any could implement special trade zones that created private banks with strong reserve criteria not linked to the government and suck all all the wealth. They'd need to do a currency trick to avoid undermining their export economies but could do this by having two currencies that float independent of one another, or just by having the private banking system store the money in gold or against a commodities index like Goldmans GSCI.