Krugman v. Keynes

Paul Krugman takes Ned Phelps to task for mischaracterizing what Keynesians think:

Phelps:

Keynesian economics, which had been nearly forgotten inside the macro field, has found new voices from outside. They take the position that fiscal “stimulus” of all kinds is effective against slumps of all causes.

Krugman:

Nobody, and I mean nobody, holds that alleged position. The position held by Keynesians — by the way, if Keynesian economics has been “nearly forgotten inside the macro field”, someone should tell Greg Mankiw that he’s an unperson — is that fiscal stimulus is necessary only under certain special conditions. Namely, when you’re up against the zero lower bound, and conventional monetary policy is useless, fiscal stimulus may be your best option.

And we are at the zero lower bound right now, for the first time in 70 years. That’s why fiscal stimulus is on the agenda — not because Keynesians believe that deficit spending is always and everywhere the best policy.

Phelps' argument is nonsense. But Krugman's "defense" of fiscal policy is pretty pathetic. I think it's probably true that many people like Krugman who consider themselves Keynesians do believe that fiscal policy is only useful at the zero bound. But this is a pretty constipated version of Keynesianism. Keynes himself thought fiscal policy was an important policy tool in general, not just at the zero bound. His macroeconomic policy program during WWII was heavy on the fiscal policy.

I think if the profession put its minds to it, we could make a good argument for using fiscal policy on a more regular basis.

- Monetary policy affects some sectors of the economy (housing, small business) more heavily than others - why should those sectors be the ones to bear the burden of stabilization?

- We probably need to use monetary policy to prick asset market bubbles from time to time, but why sacrifice the productive sectors of the economy for the sake of financial stability; why not when faced with bubbles that need pricking execute an increase in interest rates coupled with fiscal expansion?

Fiscal policy is fraught with practical difficulties - delays in passing the necessary legislation, capture by parochial interests, complications posed by environmental and labor regulations, etc. But if we spent half the effort ironing out those infrastructural details as we have greasing the skids for monetary policy (I'm thinking of the ingenious ways that the Fed has come up with to issue and withdraw reserves and manage interest rates), fiscal policy would be a much more powerful tool.