Krugman on Krugman
Paul Krugman, annoyed by an offhand caricature from economist Ed Phelps, pens a quick refresher on the thinking of modern Keynesians:
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.
The "zero bound" means that the central bank (in our case, the Federal Reserve) has lowered its key interest rate to near zero, and thus can no longer stimulate demand by lowering interest rates. At that point, monetary policy loses its power and fiscal policy -- the government, or in the case of "quantitative easing," the central bank, spending money to create demand directly -- comes into play. And this graph suggests that it's been working, or at least helping:
We began with an economic crisis that looked a lot like the Great Depression. But due in large part to the massive efforts of the Federal Reserve and the government, we pulled out of it, or seem to have pulled out of it.
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