Two quick responses on choosing depression
Scott Sumner and Marcus Nunes suggest that our policy failures are in some sense just an “oops!”, that they result from a mix of mistaken theory, institutional frictions, personal quirks, and political forces rather than being, as I argue, a choice. I’d be more sympathetic if these “mistakes” were unique to the United States. Broadly similar choices have been made in Europe, and Japan.
You can tell idiosyncratic stories of political and institutional failure for each of these countries individually. But ex ante, you’d not have expected similar policy responses. From an international balance perspective, for example, it’s not surprising that Japan did not inflate, but you might expect the United States to jump at a policy response that would reduce the burden of its considerable debt to foreigners. Yet the US and Japan seem to be on broadly parallel tracks.
There is supposed to be a constituency for stimulative policy. The conventional story is that, during a downturn, election-seeking politicians will be recklessly pro-expansion, in conflict with and checked by an independent central bank. But, at least in the United States and Europe, there is surprisingly little appetite among politicians from “mainstream” parties to emphasize either fiscal or monetary expansion. On the contrary, the political conversation revolves around restraining deficits and “being responsible”, which is code for ensuring that the demands of creditors (public and private) are fully satisfied. This may change. In Greece, Portugal, Ireland, and Spain, parties now viewed as “fringe” may gain influence. But despite a years-long downturn of Great Depression severity, so far elected politicians in all these countries have emphasized a narrative of necessary adjustment and responsibility, and have almost never agitated for monetary policy better tailored to Southern Europe or threatened disorderly default. The behavior of politicians, in Europe as in the United States, suggests that the people to which they are accountable are not primarily the fraction of their labor force that is out of work. This is different from the 1970s, when elected officials did seem to behave as though they were accountable to unemployed people, and put central bankers under intense pressure to be accommodative. Something has changed. In status quo democracies, politicians tend to respond to groups that are numerous, rich, or organized. Since the 1970s, in all the depression democracies, retirees and near-retirees have grown both more numerous (as a fraction of voters) and more rich, while workers have grown less organized. Emerging markets like China have responded to the downturn quite differently. I think this pattern is too systematic to chalk up to idiosyncratic mistakes. 
Kevin Drum writes:
[The problem is] Steve’s claim that the median influencer — whoever it is — “is panicked by the prospect of becoming poorer,” which explains our financial system’s rabid opposition to inflation higher than 2%. This claim might have made sense 50 years ago, when many of the affluent elderly were coupon clippers. But today it doesn’t make sense even for them, and it certainly doesn’t make sense for anyone else. Hardly anybody literally lives on a fixed income these days. The elderly middle class lives on Social Security, which is indexed to inflation. The broad middle class has its retirement savings invested in 401(k) funds, which do better when the economy does better. The wealthy have their money invested in a variety of sophisticated vehicles, all of which are hedged against inflation in one way or another. We simply don’t live in a world of fixed returns anymore. Unless you’re a hedge fund quant making some specific kind of inflation play, there are very few people today who have any reason to fear higher inflation, especially of the moderate, temporary sort that the Paul Krugmans and Scott Sumners of the world advocate.
Drum is right that there are no more coupon clippers. There is very little coupon to clip, because interest rates have been in secular decline for the last 30 years. But he is wrong to jump from that to imagine that upper-middle-class retirees and near retirees are immune to inflation. Affluent retirees depend heavily on asset wealth; Social Security cannot cover the lifestyles to which they’ve grown accustomed, and the expenses and commitments they’ve accumulated.
Affluent older Americans hold a large proportion of their wealth in bonds and cash-like instruments (bank CDs, money market accounts). They also maintain significant positions in stock funds that might “do better when the economy does better”. But, unsurprisingly, retirees keep the wealth they most depend upon in safer, fixed income vehicles. The proportion they keep in stock funds tends to increase with wealth.  Since they can’t clip coupons, retirees rely upon asset sales and redemptions for income. They try to manage the pace of sales so they don’t outlive their capacity to maintain their lifestyles.
Retirees living on asset wealth are very exposed to inflation. It’s an error, a fallacy of composition, to assume that the existence of hedges and “sophisticated vehicles” means that somehow everybody can be protected. Every debt contract imposes inflation risk that some party must bear. Stock markets get the press, but most financial claims on capital are structured as debt, all of which must be held, directly or indirectly, by some human (usually an old or rich human).  Any individual retiree can shed inflation risk by switching from, say, municipal bonds or bank CDs into TIPS. But retirees and near-retirees in aggregate can’t do this: there aren’t enough TIPS to go ’round, and somebody has to be persuaded to hold the unprotected bonds. TIPS already pay negative yields. If creditors grow nervous and try to herd into protected assets, TIPS yields would be driven even more sharply negative and prices of ordinary bonds would collapse. Somebody, some creditor, will bear the loss of value imposed on bondholders by inflation. It’s a game of musical chairs. No matter how sophisticated your vehicle, evading inflation risk is and must be costly if markets are remotely efficient. (If markets are not efficient and it is cheap to slough off inflation risk, then someone — quite possibly a gullible retiree — has been made a patsy and persuaded to offer underpriced insurance. “Sophisticated vehicles” tend to benefit those who structure them more reliably than those who purchase them.) 
Affluent retirees do hold some of their wealth in corporate stock, and it is obviously true that the US political system and the Federal Reserve are extremely loss-averse when it comes to the stock market. Note that some equity claims (think banks) are indirect claims on debt, and so are themselves conduits for inflation risk. And there is no necessary relationship between asset inflation and goods inflation. The interests of affluent retirees are best served when financial assets in general (both stocks and bonds) are inflating but goods prices are not. And for the most part, that is what the US political system works to deliver.  If you could promise that stimulating the economy would lead to a stock boom, much of the opposition to expansionary macro policy would dissolve. But you can’t promise that. Even if the policy “works” from an employment perspective, stocks may fall. Corporate profits are near all-time highs as a fraction of GDP, and stock markets are priced with optimistic growth assumptions already. Sharing more of the wealth with wage earners may cost more than the benefit to shareholders of incremental sales. Today’s affluent retirees lived through the most stock-market-focused era in human history. They remember the 1970s stagflation, during which the influx of women into the labor force was successfully absorbed but stocks languished. They know that stock wealth is fickle.
So people who intend to live off their nest eggs rely first and foremost on the “safety” of bonds. Expansionary policy is a hazard for them.
Consider NGDP targeting. Under this policy rule, Treasury securities would become risk assets, whose real return would be geared to the health of the economy. (NGDP path targeting implies that shortfalls in real growth must be matched by increases in inflation.) Treasuries become low-beta index funds, diversified claims on the real production. Nominal yields would be more stable, but the real value of a future payment becomes as uncertain and volatile as the business cycle.
More conventionally, an increase of the de facto inflation target from 2% to 4% would be a “tax” on whoever holds fixed income securities at the moment the change is announced. Holders of long-term bonds would lose no matter what. If the inflation target is raised in order to enable steeper negative real yields (and that is the point), then people holding short-term bills and deposits would also face a new 2% per year cost, for as long as the low rates persist. And that’s not the worst of it. Ben Bernanke is speaking in the voice of older affluent Americans when he argues that adjusting the inflation target is bad because it might disturb “anchored” expectations. What people who rely upon asset wealth really fear is a sharp, unexpected increase in inflation. And much as that may not be what dovish economists have in mind, there is no guarantee that higher inflation and lower real rates will succeed at reviving growth and employment. If the new target fails, will the Fed double down and try 6% inflation? Even if the Fed says it won’t, will nervous markets require the bank to prove its credibility at 4%? Will the Fed be willing to hike interest rates into a still depressed economy, to prove it will hold its new 4% inflation target? Should it? All bets are off.
Affluent retirees and near-retirees have very good reason to fear inflation.
 In Japan, Germany, and France, more than 50% of the total population is over 40 years old. (56.5%, 57.2%, and 50.2% respectively.) They do have children in these countries, so there are many more retirees and working-age people over 40 than there are younger workers. In the US, “only” 45.5% of the population is over 40, but I think as a polity, the United States behaves as though it is substantially older, because its unusual fecundity (for a developed economy) comes from relatively poor and disenfranchised immigrants. By comparison, China’s over-40 share is 40.3%, Brazil’s is 32.8%, and India’s is 27.1%. In the 1970s, when the US policy was, um, plainly inflationary, the over-40 share of the population was 36.1%.
Using 40-years-old as a cut-off age is arbitrary. “Retirees and near-retirees” is a vague formulation, and 40+ is admittedly a stretch. But people do not turn suddenly into zombie-like asset hoarders. As cohorts of workers age, they accumulate financial assets and become less likely to face unemployment. When they retire, their fear of unemployment disappears entirely, and their dependence upon saved assets increases. There is a continuum between the young and poor, who should prefer the risk of stimulus, and the old and rich who should not. It’d probably be best to modify my story to declare “affluent retirees and older workers” the “median influencer”.
By the way, I am guilty of data mining the cutoff age to support my case. (I examined the population pyramids.) Add whatever grain of salt you like, but I think the point stands. The data are via Wolfram Alpha, e.g. “age distribution US 1975“, then “Show Details”.
 Remember Karl Smith’s point that capital is mostly stuff like buildings and cars. In the US, the bond market is roughly twice as large as the public equity market, and that excludes debt held indirectly via ordinary bank deposits.
 Throughout this piece, I’m using “inflation risk” to encompass both the risk that inflation will diminish the real value of precontracted payments from long-term, fixed coupon securities and the risk that inflation will enable sharply negative real yields, affecting the real value of floating rate debt and short-term claims.
 This lends credence to Matt Yglesias’ view that central banks would use negative nominal rates where they do not use inflation to generate negative real yields. Negative nominal yields would deliver windfall gains to people holding stock and longer-term bonds, while negative yields engineered via inflation would have uncertain effects on stock and reduce the real value of longer term bonds (with or without capital losses, depending on whether yields follow inflation). If the American political system is geared to paying off asset holders, it’s no wonder that reducing nominal yields became “conventional” monetary stimulus.