Krugman on fiscal policy


(hat tip 2slugbaits) Krugman says here:

What I’ve illustrated here is the marginal cost and benefit of government purchases of public goods in and near a liquidity trap. The marginal benefit is presumably a downward-sloping curve. If G is low, so that monetary policy cannot achieve full employment, the marginal cost of an additional unit of G is low, because the additional government purchases don’t crowd out private spending. Once G is high enough to bring full employment, however, any further rise in government purchases will be offset by a rise in the interest rate, so that extra G does come at the expense of C, implying a jump in the marginal cost.

It’s a back-of-the-envelope model explaining why monetary policy won’t do the job and why we need fiscal policy to stimulate aggregate demand. ( I was going to try for more but injured my foot so am in no mood to continue…really, not the social kind involving mouth.)

Update: Notice the link opens in a separate window…one annoyance down. Thanks stormy.