Deficit Discussion/Clarification

Okay, so I read all of Rob's links concerning Krugman framing his liquidity trap/fiscal stimulus story. And Rob is right, he does frame the argument quite well. It seems I was speaking more out of my own incoherence than Krugman's failure to convey his ideas clearly.

So I propose we drop Murphy as I don't think he adds anything to the discussion (I regret the post) and ignore tax policy (at least for the time being) so we can focus on Krugman's deficit argument.

As I understand it, Krugman's premise is we are in a liquidity trap (interest rates = 0) so monetary policy is a gun without ammunition and fiscal policy needs to step in to make up for what the Fed and private sector can't/won't do. This can be done through tax cuts or increased spending. This is viewed as a short-term issue so it is assumed the deficit can be paid off in the long-run without signifcant inflationary costs. Also, tax cuts will be saved instead of used for investment or saving, and thus government must step in to do the spending. Ala, deficit spending is the best remedy for our current woes.

Rob, is this correct? I don't want to go any further unless I have basics of the story down.

Kling on Organizational Capital/Fiscal Policy; Shiller on the Herd

Kling on how fiscal policy should be updated to fit our modern economy which is based on the production of organizational capital versus the production of widgets. He expounds on this idea (originally Garett Jones' I believe).

He also provides an interesting quote by Robert Shiller on the herd mentality:

Consider this possibility: after all these months, people start to think it's time for the recession to end. The very thought begins to renew confidence, and some people start spending again -- in turn, generating visible signs of recovery. This may seem absurd, and is rarely mentioned as an explanation for mass behavior late in a recession, but economic theorists have long been fascinated by such a possibility.