Midwest

4. Was the 2008 tax cut an appropriate policy for that time? Did it work as intended?

The 2008 tax cuts provided for rebates to both tax payers as well as people from low income groups. Although some of the tax relief helped in giving confidence to consumers who suffered from sub-price housing crisis and the consumers increased spending by 3.5% when the rebate arrived boosting overall non-durable consumption by 2.4% in Q2 2008. However, this tax cut could not stimulate the economy to the extent it was thought to stimulate.

1. Bush administration wanted to pass on the tax rebate to tax payers only, however democrats (who were controlling both houses of congress) in 2008 wanted to pass on the tax relief to non-tax payers as well, hence the package was passed out as a compromised one which caused the burden on budget as well.
2. Larger part of the rebate was saved and or used to pay off the debts. Exhibit 7 tells us that the national savings were increased in 2008 as compared to the previous year, which tells us that consumers tends to save the money in lieu of the financial crisis hitting the economy and reducing the consumer confidence. 
3. Financial crisis of 2008 also eroded the possibility of positive outcomes of this tax rebate.

5. When Barack Obama took office in early 2009, what should he do with respect to fiscal policy? What were the potential costs and could the US afford it?

Obama should not extend Bush tax legislation after their expiration period in 2010.  He should try to stimulate the economy by increasing the Government Spending on infrastructure, health, education, energy efficient public offices. Increased Government Spending will create more jobs and increase the consumer confidence as well. Further to this, he should be careful and avoid any misallocation in government spending (do not put good money behind bad!)

It appears that Obama will have to fund these expenditures through public debts. As per Exhibit 6, CBO estimates the deficits to continue through 2019 due to increase in government spends even though tax revenues will increase from 2012 onwards when Bush Tax regime expires. The CBO further estimates the economy to growth by 4.4% from 2011 (Exhibit 6) as a consequence of government expenditure. Once the economy is on the revival path, Obama should exercise discipline to reduce fiscal deficit by having fiscal deficit targets.