Must-Read: Let me disagree a bit with Paul: although evidence does suggest that we are near full employment, we are not at full employment--and the suggestion that we are near full employment is a very weak one. The unemployment rate is 4.6%--and six years ago I would have said that 5% unemployment is full employment. The prime-age employment-to-population ratio is 78.1%--and six years ago I would have said that an 80% prime-age employment-to-population ratio is full employment. It is possible to reconcile the two by saying that hysteresis has permanently knocked 2% of the prime-age population out of the labor force. But that claim is, itself, uncertain.
Paul rests his case for continued monetary policy at the zero lower bound and for fiscal expansion on the "precautionary motive". That case is there, and is very strong. But IMHO there is still a very strong case for continued monetary policy at the zero lower bound and fiscal expansion resulting from recognition of our uncertainty about the current state of the economy.
The downsides of further expansionary policy to see if full employment is an 80% prime-age employment-to-population ratio are small. The upsides are large. We should follow Rikki-Tikki-Tavi, and run and find out.
Paul Krugman: Notes on the Macroeconomic Situation: "So the Fed has raised rates... a mistake, although not as severe... as it would have been a year ago....