David Beckworth and I have an article in The New Republic arguing that liberals and conservatives are each making big mistakes on economic policy.
What the moment calls for, then, is temporarily looser monetary policy to respond to the short-term challenges of the weak economy combined with spending cuts to solve the long-term budget crisis. Each element supports the other. For example, higher nominal incomes will put a lot of homeowners above water again, ending calls for federal intervention. Fiscal stimulus, meanwhile, will not achieve its macroeconomic goals if the Fed remains committed to fighting a non-existent inflation threat and is unnecessary if it adopts a better course. Fiscal stimulus leaves us deeper in debt; monetary expansion reduces the debt burden. It’s a pity that nobody in Washington is advocating the right policy mix.