Over the last two years there has been a debate through blogs and elsewhere between those who support fiscal stimulus and those who do not. Take Brad deLong’s analysis of this note by John Cochrane for example. To say the debate has been intemperate would be an understatement. People have complained that one or both sides have been too dismissive of the other (see, for example, Tyler Cowan here.)
Now I’m the last person to argue that economists are never guilty of unnecessary and off putting aggression and point scoring. However it is quite easy to understand what has happened here. For those in certain freshwater departments like Chicago, for example, the idea of an effective fiscal stimulus was something they had thought had died with the rational expectations and New Classical revolutions of the 1970s. It was therefore something of a shock to see it being resurrected, and it is understandable that they might dismiss it as invoking long discredited ‘fairy tales’. It looked as if 30 years of progress in the discipline was being ignored. It is clear from Cochrane’s piece that he is not dismissing New Keynesian theory – he just thinks New Keynesian theory is all about monetary policy.
On the other hand those advocating the effectiveness of fiscal policy knew perfectly well that while New Keynesian analysis certainly did emphasise monetary policy as the stabilisation tool in normal times, in a liquidity trap (or a currency union for that matter) it also implied that certain types of fiscal policy would work as well. In these circumstances, you do not react kindly to having your analysis dismissed as out of date and a fairy tale. (In fact you find it shocking and slightly unbelievable, in my own case.)While this may help explain why the debate has been bitter, it does not excuse both sides. Those freshwater economists who suggested that fiscal stimulus at a zero bound was a fairy tale that was not supported by modern macroeconomic analysis were simply wrong. Why such innovative and clever people should make this mistake is interesting, and I’ll return to this later, but wrong they clearly were. If the likes of Krugman and DeLong are guilty of anything, it is that they tried too hard to make sense of what the other side was saying. Perhaps they should have simply said "go away and read the literature".