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What Economic Research Says About Fiscal Austerity and Higher Tax Rates: Robert P. Murphy
2 paragraphs found.

Here, too, opinions differ, but it's interesting to quote the assessment from a Nobel laureate in economics, who wrote in 1998:

The point here is that the end of the Depression—which is the usual, indeed perhaps the sole, motivating example for the view that a one-time fiscal stimulus can produce sustained recovery, does not actually appear to fit the story line too well; much though by no means all of the recovery from that particular liquidity trap seems to have depended on inflation expectations that made real interest rates substantially negative.

If temporary fiscal stimulus does not jolt the economy out of its doldrums on a sustained basis, however, then a recovery strategy based on fiscal expansion would have to continue the stimulus over an extended period of time. The question then becomes how much stimulus is needed, for how long—and whether the consequences of that stimulus for government debt are acceptable. (Bold added.)

The writer of this analysis was none other than Paul Krugman, and this was after he had his much-emphasized epiphany on the relevance of old-style Keynesian analysis during a liquidity trap. As the above quote makes clear, as of 1998, Krugman himself thought that there were arguably zero historical examples of a large fiscal stimulus rescuing an economy from a deep recession; perhaps, according to Krugman, even the Great Depression was ended not by war spending, but by the effect of a change in inflation expectations on real interest rates.


Krugman, Paul. (1998) "It's Baaack! Japan's Slump and the Return of the Liquidity Trap." Available at: PDF file.