What Have We Learned?: Sometimes it’s useful to step back slightly from the current fray and ask what we’ve really learned about macroeconomics over, say, the past year and a half. Here’s how I see it: in early 2009 there was a broad divide between two policy factions. One, of which I was part, declared that we were in a liquidity trap, which meant that some of the usual rules no longer applied: the expansion of the Fed’s balance sheet wouldn’t be inflationary — in fact the danger was a slide toward deflation; the government’s borrowing would not lead to a spike in interest rates. The other side declared that we were in imminent danger of runaway inflation [Allan Meltzer], and that federal borrowing would lead to very high interest rates [Niall Ferguson].
What actually happened?
Now, the guys who got it all wrong are winning the political argument, in large part because the Obama administration went for half-measures, and is now being punished for a weak economy — which people like me predicted would happen.
But never forget that as far as the facts go, the Keynesians won this hands down.