Apr 2, 2011

Paul Krugman denies efficacy of routine Keynesian stimulus

I know that some people find this hard to understand — perhaps because they don’t want to understand — but people like me have never claimed that fiscal expansion is always and everywhere the right policy, even in response to recession. Nor are other arguments, like the argument that falling wages reduce, not increase, unemployment, universal. All of the unorthodox policy recommendations and conclusions are contingent on the economy being in a liquidity trap, in which short-run nominal interest rates are up against the zero lower bound and can’t go lower.

And liquidity-trap conditions are rare; in fact, they’ve only happened twice in US history. Unfortunately, we’re living in one of those episodes right now.

~Paul Krugman, Nobel laureate, New York Times, "Even More on 1921", April 2, 2011

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