"But many of the critics of mass fiscal stimulus have an alternative frame in mind, namely, that "employment increases spending."

Alex Tabarrok on Marginal Revolution makes a good point:

"Macroeconomics without Supply

Alex Tabarrok

Paul Krugman writes:

...if you believe that a surge in private spending would raise employment — and even the critics agree on that — it’s very hard to explain why a surge of public spending wouldn’t have the same effect.

Brad DeLong writes:

But surely we believe that if the U.S. government were to follow the Countrywide plan--to send its representatives out onto the streets to have them walk up to people and say: "Here's $500,000. You can have it if you go buy a house"--then that would drive a recovery, right?

What's interesting about these statements is not so much whether they are right or wrong (let's just say that it depends) but that Krugman and DeLong are so immersed in the Keynesian viewpoint that they cannot even see any other way of looking at the issue. Thus "even the critics" and "but surely we believe," as if no other view were conceivable.

Well if the only frame you can see is the "spending increases employment" frame then whether the spending is private or public may seem like a niggle. But many of the critics of mass fiscal stimulus have an alternative frame in mind, namely, that "employment increases spending."

Frame the issue this way and it becomes clear that the choice between private employment and public employment as a driver of spending is crucial. Moreover, when we remember that employment drives spending we focus attention on the real allocation of labor and capital across sectors of the economy, on internal and external fiscal balance, on investment as well as on consumption and on time paths of development. The "spending drives employment" frame misses all this."

These are good points. The government needs to spend money on:
1) The social safety net
2) Infrastructure
I have no good numbers on these, because, even if I were an expert, I still wouldn't know how much 1 will turn out to cost us, and 2 depends upon how many truly useful and cost efficient infrastructure projects we will be able to develop.

Otherwise, we should focus on the Fear and Aversion To Risk, which is the main problem that we are facing. The way to do that is to try and offer incentives for risk, such as tax reductions. Oddly, greater risk will lead to more jobs as lending and investment unfreeze.

One could also target consumption with a sales tax decrease or payroll tax decrease, which will be for a limited time only. This would offer some disincentive to saving, but not enough to stop all saving, since we need some increase in saving as well. Going forward, we should look into incentives for saving as well. But not right now.