03 Nov 2009

Krugman Gives a Very Qualified Defense of Fiscal Stimulus

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Krugman is mad about Phelps’ caricature of Keynesians. Phelps wrote:

Keynesian economics, which had been nearly forgotten inside the macro field, has found new voices from outside. They take the position that fiscal “stimulus” of all kinds is effective against slumps of all causes.

Krugman then explained:

Nobody, and I mean nobody, holds that alleged position. The position held by Keynesians — by the way, if Keynesian economics has been “nearly forgotten inside the macro field”, someone should tell Greg Mankiw that he’s an unperson — is that fiscal stimulus is necessary only under certain special conditions. Namely, when you’re up against the zero lower bound, and conventional monetary policy is useless, fiscal stimulus may be your best option.

And we are at the zero lower bound right now, for the first time in 70 years. That’s why fiscal stimulus is on the agenda — not because Keynesians believe that deficit spending is always and everywhere the best policy.

OK so once the Fed raises rates even a quarter point, then we will no longer be at the zero bound and Krugman will advocate an immediate deficit of $0. He will also excoriate the reckless Obama administration if deficits are positive from that point on.


For what it’s worth, I posted this question–without the sarcasm–at DeLong’s blog when he linked to Krugman’s post. I wanted to get the official Keynesian position down, so that when the Fed raises rates and Krugman doesn’t raise the same ruckus about deficits as he did when they were Bush’s, that I would at least have an official endorsement beforehand from a real live Keynesian.

Alas, my comment went through initially, but now it is gone. I’m not saying for sure DeLong deleted it–I’ve had people here on Free Advice have posting glitches and accuse me of skullduggery–but I’m just saying I made an honest attempt to confirm that this is indeed the implication of Krugman’s statement above.

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