In the last post, I concluded that the macro debate today is about whether or not at the zero lower bound monetary policy can be effective. Theory says yes; data is inconclusive.
I neglected to mention that the debate is also about whether or not fiscal policy is effective at that lower bound. Martin Feldstein, in a highly readable and short paper that anticipates and takes the reader through this whole debate, says fiscal policy can be effective in such a situation (search google scholar for a free version).
Given we haven’t seen deflation so far, fiscal stimulus is a hedge against it. Once stimulus finally comes on line, if the economy is in a deflationary spiral, it will help get it out. Of course, we all trust that if that contingency doesn’t come to pass, the spending will be quickly unwound. Right? Right!?