Krugman Agonistes

"Well yeah it's bad, but we need it, so I'll say it ain't really so bad."

In yesterday's post, "The true fiscal cost of stimulus," Paul Krugman writes:

So fiscal expansion is good for future growth. Still, it does burden the government with higher debt, requiring higher taxes or some other sacrifice in the future. Or does it? Well, probably — but not nearly as much as generally assumed.

Y'know, I like the guy. I like a lot of what Krugman says. But he's desperately trying to make an argument here in favor of debt. When I read it I was sympathetic, but I don't buy the argument. He's waffling, and he's trying to weasel around the problem of insurmountable debt.

This Is Getting Krugly

Inflation and the VietNam War

Krugman writes:

For the late 1970s was when macroeconomics experienced its great divide. It’s a period engrained in the memory of those of us who were young economists at the time, trying to find our own paths. Yet I haven’t seen a clear explanation of what went down at the time. So here’s a sketch, which I hope a serious intellectual historian will fill in someday.

Balance In All Things

"When economists write textbooks or teach introductory students or lecture to laymen, they happily extol the virtues of two lovely handmaidens of aggregate economic stabilization -- fiscal policy and monetary policy." - Arthur Okun

In 1977 when I got my three credits in economics, I learned that the government had two tools to use for managing the economy: monetary and fiscal policy. Maybe they don't teach this anymore. Maybe that is the problem.

Discretion Aside...

The Big Piece

Krugman's "big state-of-economics piece" is the focus of much attention, this fifteen minutes. Here is his conclusion:

"So here’s what I think economists have to do. First, they have to face up to the inconvenient reality that financial markets fall far short of perfection, that they are subject to extraordinary delusions and the madness of crowds. Second, they have to admit... that Keynesian economics remains the best framework we have for making sense of recessions and depressions. Third, they’ll have to do their best to incorporate the realities of finance into macroeconomics...."

Here it is in shortform:
1. Economists have ignored the imperfection of markets.
2. Keynesian economics provides the best understanding.
3. Economics must incorporate the realities of finance.

Going thru the wormhole and coming out on my side, we get the following: