DeLong disagrees with Yellen and Krugman

DeLong:

Must-Read: Let me disagree a bit with Paul: although evidence does suggest that we are near full employment, we are not at full employment--and the suggestion that we are near full employment is a very weak one. The unemployment rate is 4.6%--and six years ago I would have said that 5% unemployment is full employment. The prime-age employment-to-population ratio is 78.1%--and six years ago I would have said that an 80% prime-age employment-to-population ratio is full employment. It is possible to reconcile the two by saying that hysteresis has permanently knocked 2% of the prime-age population out of the labor force. But that claim is, itself, uncertain. 

Paul rests his case for continued monetary policy at the zero lower bound and for fiscal expansion on the "precautionary motive". That case is there, and is very strong. But IMHO there is still a very strong case for continued monetary policy at the zero lower bound and fiscal expansion resulting from recognition of our uncertainty about the current state of the economy. 

The downsides of further expansionary policy to see if full employment is an 80% prime-age employment-to-population ratio are small. The upsides are large. We should follow Rikki-Tikki-Tavi, and run and find out.

and

More Expansionary FIscal Policy Is Needed: The Only Question Is Whether for a Short-Term Full Employment Attainment or a Medium-Term Full-Employment Maintenance Purpose

If the Federal Reserve wants to have the ammunition to fight the next recession when it happens, it needs the short-term safe nominal interest rate to be 5% or more when the recession hits. I believe that is very unlikely to happen withoutsubstantial fiscal expansion. No, at least in the world that Janet Yellen sees, "fiscal policy is not needed to provide stimulus to get us back to full employment." But fiscal policy stimulus is needed to create a situation in which full employment can be maintained. It would be a rash economist indeed who would forecast a short-term safe nominal interest rate above 3% when the time for the next loosening cycle arrives:

[chart] 

Thus if we do not shift to a more expansionary fiscal policy--and the higher neutral rate of interest that it brings--now, what do we envision will happen when the next recession arrives? Do we trust that congress and the president will then understand and react appropriately in a timely fashion and at the right scale to deal with the slump in aggregate demand?

Once again, it would be a very rash economist who would forecast that. An FOMC that does not press strongly for more expansionary fiscal policy now is an FOMC that is adopting a policy that threatens to make life very difficult indeed for their successors between two and six years from now.

And, of course, there is the chance--I see it as a substantial chance--that full employment is attained at a prime-age employment-to-population ratio of not 78% but 80%--or 81.5%. In that case, Janet Yellen is wrong to say that "fiscal policy is not needed to provide stimulus to get us back to full employment."