March 15, 2012, 8:48 am
Brad DeLong and Larry Summers have a paper in progress about fiscal policy in a liquidity trap; some of the analytics here. The bottom line, fleshed out with a lot of evidence, is one that others — including me and Christy Romer — have been arguing for a while: expansionary fiscal policy under these conditions doesn’t just aid the economy in the short run, it may well even improve the long-run fiscal prospect. And austerity may be self-defeating even in fiscal terms.
If this is right (and I think it is), austerity-loving pundits and policy makers really are like medieval doctors who believed in treating illness by bleeding their patients, making the patients even sicker, leading to more bleeding.