This is what Krugman wants us to believe when he writes “The arithmetic of fantasy fiscal policy”:
Sometimes — usually, though not always, in a belligerent tone — people ask me, well, how big do you think the stimulus should have been? How much debt should we have run up? Regardless of the tone, that is actually a question worth answering. With the benefit of hindsight, we do know roughly how depressed the economy has been; we have reasonably good estimates of the effects of government spending; so we can put together an estimate of what would have happened if we had, in fact, pursued a policy of government spending sufficient to keep output at potential.
Start with the CBO estimates of potential GDP, which can be subtracted from actual GDP to estimate the output gap. Start the clock at the beginning of 2009, and the output gap — measured quarterly, but at an annual rate — looks like this:
How much government spending would have been required to close that gap? The evidence is now overwhelming that when you’re at the zero lower bound the multiplier is greater than one; see,e.g., Blanchard and Leigh. Suppose we take a multiplier of 1.3, which is fairly conservative. Then it would have taken $1.76 trillion in spending over the past 4 1/2 years to close the output gap. Yes, I know, it would have been politically impossible — but we’re just doing the economics[accounting] here.
Why doesn´t it cross his mind to, instead, write “The arithmetic of a ‘nonfantasy’ monetary policy”? And that policy would have very simply entailed the Fed, after early 2008, to keep nominal spending growing as close as possible to 5%. If that had happened there would likely be “no clock to be started in early 2009! But maybe that´s too simple for laureate minds to even consider.