Scott Sumner wants an answer from Keynesians about how fiscal stimulus is supposed to help a depressed economy if the central bank is determined to offset any impact on total nominal spending.
The answer is that it can’t. The central bank can act faster and prevent fiscal reflation. But my question for Sumner is what makes him think that the central bank we have is doing this. I know that before the crisis, Sumner reached the conclusion that this was how fiscal and monetary policy would interplay. But the same assumptions about central bank behavior that would lead you to that conclusion would lead you to assume that the central bank wouldn’t allow for a recession to last this long or go so deep. At a minimum, it’s strange that Ben Bernanke keeps saying things about how “putting in place a credible plan for reducing future deficits over the longer term does not preclude attending to the implications of fiscal choices for the recovery in the near term” if he doesn’t believe fiscal policy has a meaningful impact. I take Bernanke at his word.
It appears to be the case that the real world Federal Reserve operates primarily by targeting interest rates, and in a world like that fiscal policy makes a big difference. I also hesitate to rely on anonymous sources for my arguments, but I sometimes hear from people on the Fed staff and the complaints always point in the direction of saying I should complain less about Fed inaction and more about fiscal policy.