Most horrible correlation argument

The above is a graph that posted was by NY times for an article- SAT Scores and Family Income.
Key conclusion of the article-
"Generally speaking, the wealthier a student’s family is, the higher the SAT score."
This has sparked a debate between two of my favorite economists- Greg Mankiw and Paul Krugman.

This is straight from Mankiw's blog-
"In essence, what I said was
1. People vary in their innate talents, as measured by, say, IQ tests.

2. More talented people tend to earn higher incomes.

3. More talented people tend to have more talented biological children--that is, talent is partially heritable.

4. As a logical implication of the above three points, the raw correlation of kids' SAT scores and family income conflates the true effects of family income with the biological transmission of talent."
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Well, I cannot disagree more with Mr Mankiw because-
1. There is ample evidence in real life that suggests the opposite. Rich people have children who do not do well in examinations.
2. The argument is flawed in assuming that IQ is representative of the talent in a person. There are people who have become rich not because of the gift of intellectual endowment. There are several examples of people who did well just because of good management skills. I don't think IQ can be indicative of such things
3. The argument seems to suggest that children of rich people will do well in exams because their parent's are talented; it does not take into account the school conditions, factors such as intention of children to become intellectuals, etc. As an analogy- How,/When/Where the seeds of a rose plant are sowed determined the quality of the rose flower. If you plant the seeds in a desert and do not give any water, then the result is obvious.
4. I assume that the author of the original article will agree with the below statement:
"Transfer of money to dumb people will make the dumb people rich and hence intelligent"

WB loan for recapitalization of Public Banks

The World Bank and India have concluded negotiations for loans worth $3.2 billion for recapitalising state-run banks and funding for the India Infrastructure Finance Company Ltd.

The World Bank board would meet in September in Washington to approve a $2 billion loan for the recapitalisation of the state-owned banks and another $1.2 billion loan for the IIFCL. - Source: Economictimes
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Although, the intention to recapitalize the banks and spend on infrastructure is 100% right, I don't see any need for a loan from "The Bank" at this stage because-
1. In the middle of the crisis last year, the average CAR ratio of public banks was around 13%. I don't think that this ratio would have fallen drastically since then
2. Infrastructure spending is required right now. But, frankly we can't be throwing money at the problem. Effective investment strategies are required; we have spent enough. Govt should focus on following the money that it has already allocated for infrastructure and ensure that the money enters the system soon

Government spending- temporary energy injections

Here is Ken Worsely on Japanese spending-

GDP up on government spending
Despite the 0.9% rise in GDP over the April-June quarter, there remain some skeptics worried about how strongly Japan will be able to recover from multiple quarters of negative growth. The Nikkei published an article yesterday entitled “Jobs Weakness Could Slam Brakes On GDP Growth, Economists Fear“. The Nikkei puts it simply: “For Japan, the biggest challenge is whether the stimulus measures can create sufficient private-sector demand to trigger a self-sustaining economic recovery.” Of course, this is impossible, as stimulus measures are temporary and mainly serve to increase national debt. ...more
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I am a keynesian by heart, hence I place a lot of emphasis on government spending.
On the question of debt -
Yes, govt spending will increase the govt debt, but not necessarily the debt/GDP ratio. In the medium term the benefits of the govt spending will increase the GDP, as Ken has correctly pointed out. Hence, a case of increase in numerator and denominator

Temporary energy injections?
1970s was a time when monetarists had completely dumped Keynesian explanations and theories about recession. However, fortunately people today have realised how keynesian policies are necessary along with monetary policies. Almost every country has designed and implemented a govt spending program. I am not suggesting that govt spending is self sufficient for a quick recovery, I am just trying to suggest that govt spending could lead to sustainable recovery if effectively supplemented with monetary expansion policies (assuming that there is no structural problem in the economy)