What Would Tell Me I am Wrong?

Dear Conservative,

I know you and I have a different perspective on how to improve the economy. I strongly believe that we need more fiscal stimulus and you believe that we don't and need to focus on cutting the budget instead. I get frustrated that the evidence is on my side and that you can't be looking at the evidence clearly to arrive at your position. It makes me crazy that you aren't challenging your assumptions.

So let me show you how it's done by challenging my assumptions. Here is the way I see it. We have high unemployment that isn't improving in any real way. So the two options for fixing that are monetary policy or fiscal policy.

Normally, to use monetary policy, the Federal Reserve would lower interest rates. This has the effect of making saving money less attractive than investing and spending money, having an expansionary effect. However, monetary policy will not work because interest rates cannot get any lower - they are at the zero bound (liquidity trap). In other words, it would take a negative interest rate to get people to decide to spend instead of save. So the only option is fiscal policy.

But what would it take to convince me that I am wrong? Any number of things. If unemployment were decreasing. Or if someone could show me that monetary policy would work (some say if we announced a policy to let inflation increase and promised to maintain it for a certain number of years). Or that fiscal policy will do more harm than good.

It seems conservatives (you) are trying to say that we should try neither monetary or fiscal policy - that things will get better if government gets out of the way. I thought the great depression proved that wrong.

There is also a mindset that if we cut budget deficits, the magic confidence fairy will allow for growth. But there is no evidence that current short-term budget deficits are causing investor concerns. Inflation and interest rates on government bonds remain low.

They (you) are also saying that fiscal policy will cause more problems, that more fiscal stimulus and the higher deficits that would go along with it will increase bond rates. But again bonds are very low right now.

In other words, I am convinced that I have already thought about what would convince me that I am wrong and none of those things hold. We are in a recession, and we need to take action to get out of it. Unfortunately, monetary policy won't work. And you won't let us pass fiscal stimulus. Maybe you should reconsider your position.

Update:
Further evidence that convinces me that I am not wrong: surveys by the US Chamber of Commerce and the National Federation of Small Business (hat tip, Jared Bernstein) shows that the economy or weak sales (respectively) are the biggest problems facing small businesses. Now, the NFSB finding speaks for itself, but the Chamber finding, where "the economy" is the biggest problem, needs some explaining. You'll see that the Chamber survey isn't really an attempt to figure out what businesses need, but to create a document they can use when lobbying Congress for tax cuts. Even with such a biased survey, businesses were more concerned with the economy - which I read as depressed sales (demand) - than with taxes.