Should We Use Expansionary Fiscal Policy Now Even If the Economy Is at Full Employment? Yes!
When should you use fiscal policy to expand demand even if the economy is at full employment?
First, when you can see the next recession coming: that would be a moment to try to see if you could push the next recession further off.
Second, if it would help you prepare you to better fight the next recession whenever it comes.
The second applies now whether we are near full employment or not. Under any sensible interpretation of where we are now, using some of our fiscal space would put upward pressure on interest rates and so open up enormous amounts of potential monetary space to fight the next recession. It would do so whether or not it raised output and employment today as long as it succeeded in raising the neutral interest rate–and if a large enough fiscal expansion does not raise the neutral interest rate, we do not understand the macroeconomy and should simply go home.