What if Paul Krugman is right? Or at least in the neighborhood of right?

The New York Times columnist and Nobel laureate economist has been warning for months: The economy is not recovering.

Through the spring of 2010, Krugman’s warnings seemed to be refuted by signs of growth. But in recent weeks, that expansion has faltered. Private-sector job creation is sputtering. Yesterday's market drop was especially alarming. Back of it all is the huge anchor that continues to weigh down the economy: the crushing debt load on homeowners.

Here's a simple way to think about that load. About 44 million U.S. households carry a mortgage. For about 11 million of those, their mortgage exceeds the (current) value of their home. More than 8 million of the 11 million are still making good on their loan payments. But what happens if more people just quit paying?

Krugman's warning raises a haunting policy question: What can we do to accelerate growth and create jobs?

One result: America's already sick banking industry would become sicker. Already, it subsists on life support. The Federal Reserve creates money, which it lends to banks for next to nothing. The banks effectively walk from one wicket, where they borrow money for free, over to another wicket, where they lend it back to the government at 3 percent interest.

This accounting game provides banks with a tidy income so they can build their reserves and (it’s earnestly hoped) resume commercial and household lending.

But what if people do not want to borrow? People do not borrow just because credit is available. They do so when they see attractive opportunities to put capital to use. Such opportunities are not exactly abounding these days.

Krugman’s answer is that government should do the borrowing instead, in part to support personal incomes and state government budgets, but especially to substitute for the languishing impetus of the private economy. If no businesses wish to borrow money at 3 percent to build high-speed rail lines or advanced electrical grids and put Americans to work, then government should build instead. Jobs are created, infrastructure is improved, the economy kicks into higher gear, and the shade of John Maynard Keynes smiles approvingly.

Krugman’s prescription is the weak part of his argument. It depends upon all kinds of hypotheses and assumptions from the Keynesian arsenal of ingenuity. Certainly the results of the almost $800 billion spent on fiscal stimulus are not exactly encouraging. Krugman and his supporters offer two main answers to critics of the stimulus: It was not big enough, and too much of it took the form of tax relief instead of direct government expenditure.

That rebuttal reminds me of the old Jewish joke about the Catskills hotel: "The food here is terrible. And the portions – so small!"

The Obama stimulus has failed for many reasons, but here are three that even Krugman and his supporters must surely see:

1) The modern American federal government moves very slowly. Suppose we did decide to borrow another trillion for high-speed rail and electrical grid improvements. How long would the contracting and environmental assessments and judicial challenges take? When could work realistically commence? Half a decade hence? By then the economy would have limped to some kind of recovery of its own by even the most pessimistic reckoning.

2) The projects imagined by the advocates of direct spending are technology intense. But the workers hit hardest by this recession are those with lower skills, and especially the kind of semi-skilled labor employed in the simplified assembly-style housing construction of the 1990s and 2000s. Roosevelt’s New Deal set people to work maintaining parks and improving roads. The public investment stimulus in Krugman’s updated New Deal would operate more indirectly: It would enhance the demand for skilled workers who might very well still be employed, in the hope that those skilled workers would in turn buy things that could be made or done by less-skilled Americans. But what if those government-employed workers spent their extra income on made-in-Japan autos or made-in-Korea flat-screen televisions?

3) Remember, the fundamental problem is a damaged financial system. But the Krugman remedy for that problem is even more indirect than his remedy for unemployment: Direct government spending will (it’s asserted) boost aggregate demand, which will raise incomes, which will support housing prices, which will over time fix the banks. Compared with that Rube Goldberg operation, the current idea — just give the banks money! — seems a model of rationality.

But if Krugman’s direct government expenditure is not a very good policy answer, his dire economic warning remains a haunting policy question. What can we do to accelerate economic growth and job creation? For those of us on the free-market side of the debate, the question is even more haunting: What’s our countervailing idea? And if our countervailing idea is tax cuts, what is our reply to the obvious rebuttal that the Bush tax cuts have been in effect through the whole of this crisis, seemingly without effect?