All the players are basically as you would expect. Barro thinks that stimulus does not work, and that austerity is the solution. Krugman is nasty to Barro, off cuff, and thinks it is all about demand – but is basically at cross purposes with Barro. Mankiw is moderate; and Chin presents facts and is typically soft-left.
It is worth reading Chin, who shows that firms have fairly robust demand for new capital, relative to the prior recession-recovery. The real problem is that their demand is not sufficient given the real and financial resources available to them.
My assessment is that uncertainty – both regulatory and otherwise – is having a big dampening impact on both the real economy and financial markets. For example, equities are very cheap by most metrics, but cash keeps flowing into fixed income. It piles in as fast as governments can issue, as both household and corporate savings are directed into fixed income, thanks to a strong preference for lower risk government debt.
What is the solution? The world needs long term reform of entitlement and health spend (yes, even Australia) to create a credible medium term fiscal framework within which increased spending is plausible. Once fiscal credibility is established, large scale Government investment in long term infrastructure should be undertaken.
Wasteful spending is not okay, it has to be stuff that has an IRR that is higher than Government borrowing rates – but that should not be hard, particularly in the US and UK, where long term real yields are negative.