Must-Read: Simon Wren-Lewis: Very Serious People and the Deficit

Must-Read: Back in 2010 there were people saying:

• If you are not at the zero lower bound, fiscal policy is not necessary to stabilize the economy.
• If you are at the zero lower bound, the situation is so dire that using fiscal policy to stabilize the economy will require running the debt up to dangerously high levels.

The question is why six years of interest rates at rock bottom have not led more people to change their views of what “dangerously high” means in terms of debt. It remains a mystery to me.

Simon Wren-Lewis: Very Serious People and the Deficit: “George Osborne argued explicitly that the economic consensus was now that monetary policy should deal with stabilising output and inflation, while fiscal policy makers should look after their own deficit…

…I have called this the consensus assignment. If he, or his advisors, absorbed this piece of conventional wisdom, so may VSPs and mediamacro. So the headline academic scribbling was governments should control deficits, not the economy, and they are bad at it…. VSPs and the media more generally [would have] a clear role in providing a public service to help counteract the wickedness of politicians… to constantly advocate deficit reduction to counter deficit bias….

A little knowledge can be a dangerous thing…. [We] knew the conventional assignment broke down when interest rates hit their lower bound. We knew that a liquidity trap was absolutely not the time to worry about deficits, and if you did so you would cause tremendous damage. And we were right.