The Case for Fiscal Expansion
By Arnold Kling
There is an argument for fiscal expansion, which is “unemployment is bad, and Republicans are bad for wanting to cut spending, especially when there is a lot of unemployment.” However, if you want to change someone’s mind, you need something with more economic content to it.
From the perspective of textbook macro, the case for fiscal expansion in the United States right now would seem to rest on two points.
1. Wages are too high relative to prices, and general inflation will cure this faster than waiting around for wages to fall.
2. The Fed is powerless to cause inflation, because it cannot lower interest rates below zero.
Scott Sumner is the only economist who consistently explores these assumptions. He insists that (1) is true and (2) is false.
What is weird is that I never can find advocates of fiscal expansion articulating (1) directly. I infer that they believe (1) from posts like this one, from Mark Thoma. When you say that the problem is aggregate demand, then from a textbook perspective you are saying that real wages generically are too high. If Thoma and other advocates of fiscal expansion are saying something else, I hope they let me know.
What is also strange to me is that hardly any economist who advocates fiscal expansion will articulate (2) with a straight face. They will throw around terms like “zero bound” or “liquidity trap,” but I doubt that even Paul Krugman is prepared to commit himself to the proposition that the Fed lacks the means to cause inflation if it wants.