What does one have to do?

Krugman links to Krugman:

If there is a single word that appears most frequently in discussions of the economic problems now afflicting both the US and Europe, that word is surely “debt.”

I doubt that. Krugman continues:

Sharply rising debt, it’s widely argued, set the stage for the crisis, and the overhang of debt continues to act as a drag on recovery.

Not widely enough. Private debt is still largely ignored. Debt is often said to be the same as credit, and credit is thought to be beneficial.

Krugman again:

The current preoccupation with debt harks back to a long tradition in economic analysis, from Fisher’s (1933) theory of debt deflation to Minsky’s (1986) back-in-vogue work on financial instability to Koo’s (2008) concept of balance-sheet recessions.

Yet despite the prominence of debt in popular discussion of our current economic difficulties and the long tradition of invoking debt as a key factor in major economic contractions, there is a surprising lack of models – especially models of monetary and fiscal policy – of economic policy that correspond at all closely to the concerns about debt that dominate practical discourse.

What does one have to do, to construct a "model" that will satisfy some unspecified set of conditions and make economists think it is a "model"? I'm sure I don't know.

I used to avoid using the word "model". But then somebody asked me, How does your model work under such-and-so condition?

Krugman says "there is a surprising lack of models – especially models of monetary and fiscal policy – of economic policy that correspond at all closely to the concerns about debt that dominate practical discourse."

I say there is a contradiction between our assumption that printing money causes inflation, and our assumption that using credit is good for growth. These assumptions lead to a contradiction between monetary and fiscal policy, a contradiction that is the root cause of debt growth.

What more must I do? What kind of model do they want?

Even now, much analysis (including my own [Krugman writes]) is done in terms of representative-agent models, which by definition can’t deal with the consequences of the fact that some people are debtors while others are creditors.

For the record: It does not matter that "some people are debtors while others are creditors." Some are this and some are that as a result of increasing concentration of wealth and income. The fact that some are this and some are that, increasingly, accelerates the growth and increases the severity of the problem. Yes.

But the problem at root is not that some are creditors and some are debtors. That will always be the case.

Nor is the problem at root the increasing concentration of wealth and income. (Later in the cycle of civilization, yes; but not at present. At present we still have the ability to create policies to deal with such things. At present, we lack only the sense to do it.)

The problem is the increasing cost of finance, due to the growth of finance. Financial cost hinders the growth of the productive sector, making financial investment more appealing that productive investment. And that only makes the problem worse.

The increasing concentration of wealth and income is a convenient vehicle by which the increasing cost of finance carries our economy toward an ending from which no recovery is possible.

// Part 1 of 4. More tomorrow.