Rodrik clarifies the debate?

Rodrik observes, as Wilkinson suspected, the margin on which economists are debating the fiscal stimulus isn’t economics. Instead the Krugman vs. Chicago debate is “philosophical, political, and practical–revolving around the role of government, the extent of rent-seeking and public-choice concerns in government programs, and the right mixture of prudence and boldness that the situation requires.”

I’m not convinced. There’s the issue of whether monetary policy is impotent or not given zero interest rates. Krugman says “traditional” money policy — swapping treasuries for cash — is impotent and he’s right. If the policy choice was just between traditional money policy and fiscal stimulus than Krugman would be right about the necessary policy and Rodrik would be right that this was a debate about ideology. Big government types observe traditional money policy is broken and advocate government expansion. Small government types hate that idea and rail against it.

The choice, though, isn’t between traditional money policy and fiscal stimulus. There are a number of papers showing monetary policy doesn’t have to be impotent when we run up against the zero lower bound of interest rates. The ideological battle dissolves (unless you really, really want fiscal stimulus) because with non-traditional monetary policy we’re still talking about huge government intrusion in markets — albeit temporary and reversible. Non-traditional monetary policy has the Fed intervening in capital markets — running them as Cochrane puts it — but this sort of policy is preferable to fiscal policy for a number of reasons outlined in that Cochrane article, but primarily because its much easier for it to adjust to prevent inflation.

In any case, we’re back to fighting over economics.