Comment of the Day: I would note that by the mid-1980s fiscal policy was nowheresville--that the consensus was that monetary policy was much better suited for the task for a large number of reasons, and that fiscal policy (besides automatic stabilizers, which were regarded as helpful) was unnecessary either because the liquidity trap was a historical curiosity or because it did not exist--that cash money burned a hole in people's pockets even when short-term safe nominal interest rates were zero. And then, of course, there followed what Robert Waldmann correctly calls: "the decision to abandon methodological individualism and instead assume Nash equilibrium, Clairvoyance and ESP (but I repeat myself)" that led "otherwise reasonable people" into incoherence:
Charles Steindel: Undergrad Textbook Macro vs. Really Existing Academic Macro: "I think you are basically right, but the QE story is more complex...
...Faith in the powers of unconventional monetary policy, with related dismissal of fiscal policy, I think, actually traces back to Paul's work on Japan in the early 90's (the central bank merely has to invoke those higher inflationary expectations and all will be well). Of course, if central banks must use unconventional policies, because the fiscal authorities are too timid to do their jobs, they have to sound confident about it (this is a nuance which gets lost in the discussion). Generals don't win battles by telling their troops "if only we had enough equipment..." If the economy doesn't respond as strongly as the central bank "says" it will (the true statements are heavily nuanced, but that part isn't seen) it's viewed as a the failure of the bankers, of all sorts of macroeconomics, etc.
It's true there are a few who still cling to RBC or simple Taylor rules and think central banks shouldn't have done any unconventional policies, and some officials cite them, but I think that's a fairly small group. It's the academic disinterest in expansionary fiscal policy in the face or a liquidity trap that is truly aggravating.
If you read Stan Fischer's excellent speech from last March summarizing macro over the last 50 years (it is on the Fed web site; our October issue of Business Economics has finally appeared in hard copy with it) you will see that he gives due and proper recognition to fiscal stabilization (when I was in grad school in the mid-70s, Stan and Cary Brown taught a course on "stabilization" which gave equal time to money and fiscal). Olivier Blanchard has also toiled trying to revive interest in fiscal policy. So the core of MIT macro was aware of these issues, but it just never got deeply into the theses and journals (I also recall Alan Blinder making a fairly strong call for revived fiscal analysis at a Boston Fed conference early last decade). Despite these calls, it doesn't happen.
I think it's because deep analysis of fiscal policy is tough, since the decisions are made by elected bodies, not by 19 (or 12 or 10, if one wants to be technical) people sitting around a table 8 times a year on Constitution Avenue.
The frustration I share with Paul and you is that while the deep analysis is very hard--by deep, I mean going beyond glib statements about Ricardian equivalence, liquidity constraints, expansionary austerity, and the like--I don't think the positive practical advice is that tough, as you and Larry Summers noted in your Brookings Paper.