The ‘Strong Case’ Critically Examined: “The deficit obsession that governments have shown since 2010…:
… has helped produce a recovery that has been far too slow, even in the US. It would be nice if we could treat that obsession as some kind of aberration… but unfortunately that looks way too optimistic. The Zero Lower Bound (ZLB) raises an acute problem for… the consensus assignment… [of] leaving macroeconomic stabilisation to an independent, inflation targeting central bank) [and when you] add in [fiscal] austerity… you get major macroeconomic costs. ICBs appear to rule out the one policy (money financed fiscal expansion) that could combat both the ZLB and deficit obsession….
Many macroeconomists do see the problem, but the solutions they propose are often just workarounds… [q]uantitative Easing… NGDP targets… a higher inflation target… mean that in response to a sharp enough recession, we would still regret no longer having the possibility of undertaking a money-financed fiscal stimulus.
I also think there is a grain of truth in the argument that ICBs created an environment where deficit obsession became easier…. Ask the following question: in the absence of ICBs, would our deficit obsessed governments actually have undertaken a money financed fiscal stimulus? To answer that you have to ask why they are deficit obsessed. If it is out of ignorance (my Swabian syndrome), then another piece of macro nonsense that ranks alongside deficit obsession is the evil of printing money in any circumstances. I suspect a patient suffering Swabian syndrome would also be subject to this fallacy. If the reason is strategic (the desire for a smaller state) the answer is obviously no. We would simply be told it could not be done because it would open the inflation floodgates.