Scott Sumner notes decreasing hostility to the notion of monetary stimulus on the left, with Martin Wolf’s latest post as Exhibit A:

As you’d expect, Martin Wolf’snew piece in the NYR of Books ends up in a suitably ecumenical fashion:

The right approach to a crisis of this kind is to use everything: policies that strengthen the banking system; policies that increase private sector incentives to invest; expansionary monetary policies; and, last but not least, the government’s capacity to borrow and spend.

But I also see a huge blind spot in Wolf’s piece, which slants the results in a very revealing way.  Wolf provides a blow-by-blow account of how fiscal austerity slowed the recovery after 2010, and provides this graph to illustrate his points:

As Scott explains, the ECB (easily the worst performer of the major central banks) tightened money in 2011, essentially producing the current recession with no fiscal help needed.

While it’s unreservedly good news whenever anyone comes around on monetary policy, Wolf remains one of those more-Keynesian-than-Keynes economists who generally believe the fiscal stimulus of WW II is what ended The Great Depression because GDP rose and unemployment fell — never mind that American living standards declined dramatically because millions of men were conscripted and consumer goods were tightly rationed while we produced lots of GDP-boosting goods useful primarily for killing people and breaking things across Europe, Asia, and the Pacific Rim.

But back to our present dilemma (sufficient unto the day!).  So, let’s all agree that the “austerian” tax hikes were a bad idea — no one on the small-gov’t right ever favors tax hikes anyway. Okay then, what happened to spending? Well, despite furious efforts to obscure the facts by the anti-austerians, spending hasn’t fallen.

So the anti-austerians are left essentially arguing the government should be spending even more borrowed money than the levels that propelled them into insolvency. This is not a solution, this is ideology run amok, an attempt to deal with Fenrir’s ominous growth by feeding him yet more, and no one should take these arguments seriously.

Unfortunately, these irrational arguments are popular among the insolvent, where government dependency runs deep.  And that creates a dilemma for the ECB — it’s politically difficult for them to simultaneously bail out the insolvent and run a policy of looser money, because that amounts to allowing the insolvent to print money at the expense of the solvent.  The perverse result: the EU gets a horrible compromise policy under which taxes go up, money stays tight, everyone’s in recession, and insolvent governments get more bailouts.