Medicine for a sick economy

So many of the policy disagreements in our government today center on how to best tend to our economy. Our economy is sick, hampered, weighed down, understimulated, over-regulated....  That's a lot of diagnoses, but which diagnosis is correct, and what is the best treatment?

I haven't ever officially studied economics, so like all of my analysis, this is based on observation conducted over 3 decades. The two main schools of economic policy seem to be Keynesian and supply-siders. In our current doldrums, Keynesians think we need another big stimulus to drive up demand, get money moving again, and spur job creation. Supply-siders focus on barriers to economic growth that diminish the natural impulse to innovate and seek profit-making opportunities.

In the last 30 years, we've seen both the benefits and the limits of supply-side economics. Lowering marginal tax rates from a ridiculously high rate of 70% to the neighborhood of 25% to 40% did encourage growth, as did breaking up the telephone monopoly and computing monopoly. It was great fun in the 80's watching and cheering on the fireworks of economic change. The mothership of Ma Bell (AT&T) was hit with a killing blow, cracked open, gave birth to the 5 Baby Bells, and her death fertilized the ground for the flowering of the telecoms boom. (Yes, it was a modern-day replay of a polynesian creation myth.)

But in the past 10 years, additional tax cuts have given us decreasing-return-on-investment, that dreaded point where the same strategy starts to fail, and you glumly realize you've got a real puzzle on your hands.

Be warned, this doesn't mean it's time to turn back to Keynesian theory, which failed us so badly during the stagflation of the 70's. We've had nearly 3 years of open money-supply spigots. Though it stopped the hemorrhaging of jobs in 2009, it hasn't returned the economy to its norms of the 1990's or 2000's. The cost of this stimulus (perhaps $1.3 trillion over the last 2 years and still high when compared to spending levels of 2007-8) is heaped onto our $14 trillion debt. If stimulus could be done at no cost, it would be wonderful. We'd just wind up the top a bit, and then let it go. But there is a huge cost to a big stimulus. I don't support another one because the jobs situation has stabilized for over a year now, and additional spending since then hasn't bought a significant increase in employment.

If the economy refuses to be cured by Keynesian stimulus, and hasn't responded to supply-side medicine in the past decade, what are we going to do? The electorate and their representatives may demand some kind of medicine, but maybe the economy can only be cured by time and minimally-invasive prudent policy. We may hate it when our doctor tells us to eat right, lose weight, get more sleep, and exercise regularly, because that is the only thing that will cure us of being a fat slob. But that is the best advice from the doctor when medicine K and medicine S/S aren't working. So stop thinking there will be a cure in pill form, and get ready for the slow, gradual, tedious, bumpy recovery.