This is, I think, 100% correct. And this is important enough that I think it now puts Larry on the short list for the Nobel Prize. IMHO, his career up until now has been worth at least 2 Nobel Prizes, but the problem is that his contributions have been spread out over eight different subfields of economics. But this is, I think, more than a home run—this is a grand slam: Lawrence H. Summers: Responding to Critiques: "No one from whom I have heard doubts the key conclusion that a combination of meaningfully positive real interest rates & balanced budgets would likely be a prescription for sustained recession if not depression in the industrial world...
...Notice that this is a much more fundamental argument than the suggestion that the some effective lower bound on interest rates may impede stabilizing the economy.... A central feature of New Keynesian models is an idea that economies have an equilibrium to which they naturally revert independent of policies pursued. Good central bank policy achieves a desired inflation target while minimizing amplitude of fluctuations around that equilibrium. In contrast contemporary experience suggests that central banks acting alone cannot necessarily attain inflation targets and that misguided policy could easily not just raise the volatility of output but also reduce its average level. While there seems to be little doubt that real interest rates–short and long, ex ante and ex post — have declined substantially even as budget deficits and expanded social security programs should have increased them, there remains debate about how to analyze these trends...
#noted
