Paul Krugman made his reputation as a research economist applying ideas from regional science to international trade. Of late, he's taken an interest in macroeconomic policy, with mixed results. On one hand, he's made the case for better national income accounting. On the other hand, sometimes he sounds like just another hack for the left wing of the Democratic Party. A few years ago, he made the case for intellectual diversity in macroeconomics in The Return of Depression Economics and the Crisis of 2008, reviewed here. The intellectual diversity he's referring to is received Keynesian macroeconomics, the mainstream intellectual tradition from the late 1950s into the 1960s, but one obscured or marginalized or ignored since the emergence of rational expectations and real business cycles and micro-foundations since then. In End This Depression Now! one of the lines of argument he raises is that academic economists committed an intellectual error by so doing.
Because the book is written for the educated layman, not the macroeconomics workshop, it has more by way of polemic and less by way of recognition of stagflation and the rest of the real-world events of the 1970s that gave the New Classical and other lines of research the anomalies calling for a new paradigm. Book Review No. 19 suggests that if readers take End This Depression in the spirit in which it is offered, and filter out the polemics and the academic score-settling, there might be a little bit of instructive stuff, such as the fundamental problem with the Euro being the absence of any sort of central bank with credible borrowing and lending ability (that problem also being an argument against allowing each state of the U.S. to have its own currency), and the possibility that when an economy appears to be in a liquidity trap, some aggressive fiscal policy might be in order. At the Chicago Tribune, Steve Chapman writes something that reads a lot like Krugman.
By now, it should be obvious that the problem is not that the Fed has injected too much money into the economy but too little. The price of gold — which jumps at the slightest whiff of inflation — has plunged from more than $1,900 an ounce last year to less than $1,630.
The commodity price index is down 7 percent from a year ago. Home sales have been tepid despite mortgage rates lower than anyone could ever have dreamed.
When lenders anticipate debasement of the currency, they demand higher interest rates to compensate for the risk. But currently, five-year Treasury bills are paying 0.71 percent, and 20-year bonds offer only 2.33 percent. In the mid-90s, a period of low inflation, those rates ranged well north of 5 percent.
That, stated simply, is the basis of the Krugman recommendation for ending the depression: take those cheap borrowings, use them to employ people, and make use of the accounting identity that my purchase is your income.
Whether Professor Krugman has correctly analyzed the Obama administration as being too cautious in its fiscal policy, or whether subsequent research will understand the administration as attempting too many things with its stimulus (most notably, shovel-ready is a nod to environmental interest) will await the production of a few doctoral dissertations. That is, if there are any academic departments left to produce dissertations.
(Cross-posted to Cold Spring Shops.)