Everything You Need to Know About Fiscal Policy

1. Its benefits are probably ambiguous. For every paper that says it’s good, there are some that say it is not.

2. The most powerful argument against fiscal policy has nothing to do with whether it works or not, actually. And Krugman knows it:

there is now overwhelming evidence that fiscal policy does in fact work when it’s not offset by monetary policy

Scott Sumner would say that Japan is all the evidence you need to know that the monetary authority will work to neutralize fiscal stimulus no matter what happens. It’s because ALL stimulus also raises inflation.

If people are freaked out by inflation via central bank monetary policy, they’re freaked out even more when it comes via big government. And the central bank is not interested in freaking anyone out.

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