Paul Krugman, fearless economist, explains liquidity traps for the non-economists among us. Interesting stuff. He gets political towards the end, but I happen to think he’s mostly right. The extra few hundred bucks parents get on their taxes may make more of a difference than he claims, though.
Parenthetically, I am a bit baffled as to why more liberal commentators don’t address that aspect of the tax cut. It’s very hard to convince people that the tax cut mostly benefits the rich when you completely ignore the increase in the child credit. 400 bucks per child is not chump change. It is a pretty small percentage of the total cut, but that doesn’t mean middle and lower class parents won’t notice it, and you just look like a complete idiot if you pretend it doesn’t exist.
Back to the liquidity trap. Basically, the liquidity trap is what happens when you run out of room to lower interest rates. Suddenly, you’re short on ways to encourage people to spend money. This makes it hard to kickstart the economy. It happened to Japan, and there are signs we may be close to it; the EU is certainly close to it.
Krugman explains it way better than I do, anyhow.