Krugman's article is basically a nostalgia fest, with Krugman arguing for Keynes over Friedman, East Coast economics departments over Great Lakes economics departments. Big whoop ... It's like baseball fans arguing over Mickey Mantle vs. Ty Cobb as a centerfielder on your all-time all-star team.
I'm sorry, but this is the 21st Century, and the critical problems we face are the ones that economists have tried hard to ignore.
Krugman, for example, totally ignores inconvenient realities, such as the bipartisan push by politicians for more mortgage lending to minorities, which played such a huge role in the mortgage meltdown that launched the recession.
Similarly, immigration is never mentioned. As I blogged on August 26, 2005:
Amusingly, the extremely low interest rates that are propping up the economy today are causing a boom in home construction in the exurbs (i.e., creating more of the exurban sprawl that Krugman derides). While the home construction boom is doing nothing to help us compete better economically with the Chinese, it is sucking in more illegal immigrants to work in construction. In turn, the rapidly rising populations of unassimilated Hispanic immigrants is triggering more white flight out to the exurbs and raising demand for new McMansions. [What I wasn't aware of in 2005 was how much of the lending was going to minorities.]
You might think that this process would interest economist Krugman, but you'd be wrong. Since 2001, Krugman has barely mentioned immigration at all, despite writing 100 columns per year for the New York Times. The problem he faces is that he and his bete noire George W. Bush hold almost identical, visceral, non-rational views on the goodness of immigration, so Krugman is just not going to mention the entire subject.
You might think this merely reflects Krugman's personal idiosyncrasies, yet it's also representative of how almost the entire economics profession in the U.S. has been AWOL on this enormous issue, one with obvious and profound economic implications. Economists have largely ignored immigration in recent years, and when they do discuss it, often spew self-evident nonsense that they would flunk an Econ 101 student for writing on a test on any other subject.
Meanwhile, even when it comes to conventional economics, Krugman still doesn't get the Austrian theory of how malinvestment causes recessions. He's outraged that an opposing economist says:
“We should have a recession. People who spend their lives pounding nails in Nevada need something else to do.”
Personally, I think this is crazy. Why should it take mass unemployment across the whole nation to get carpenters to move out of Nevada?
I explained at length last October why all the giant unfinished casinos in Las Vegas inevitably cause unemployment. Krugman wrote in 1998:
For if the problem is that collectively people want to hold more money than there is in circulation, why not simply increase the supply of money? You may tell me that it's not that simple, that during the previous boom businessmen made bad investments and banks made bad loans. Well, fine. Junk the bad investments and write off the bad loans. Why should this require that perfectly good productive capacity be left idle?I responded:
Look, the hulk of the Echelon [casino] on the Strip isn't perfectly good productive capacity. It is, at present, perfectly no good productive capacity. It's worse than nothing because the owner has to keep paying the interest on the loans he took out for the money he's already spent on it. He has calculated, however, that it's somewhat less ruinous to let it sit idle than to finish the monstrosity for the Californians who won't be coming again for years. So, the owner of the Echelon isn't going to be spending as much on either consumption or investment as he had been planning to....
But the newly unemployed of Las Vegas aren't good workers in the post-Bubble economy. They are construction workers, croupiers, waiters, touts, whores, and other professions that we won't have much use for for a number of years. Hopefully, some of them will develop new, more valuable skills, but that will take years. And when you actually check the numbers on the newcomers to Las Vegas, you don't get a warm feeling that many of these folks are going to turn into solar energy technology inventors or whatever anytime soon. If we're lucky, a lot of them will go home to Mexico, where it's much cheaper to be poor than in America. If we're not lucky ...
Unfortunately, due to advice like Krugman's, we didn't have much of a recession in 2001-2002 due to inflating the money supply, both by the Fed and by easing up on mortgage lending rules, so now we are paying the price in spades.
The Tech Bubble was stupid, but at least pouring huge amounts of money into Cisco Systems had a certain surface plausibility. Cisco actually made something ... In contrast, building oversized homes outside of Las Vegas for the mortgage brokers who sold their old homes to the new blackjack dealers who got hired by the new casinos to fleece the Californians with home equity loans on their houses that were going to rise in price to infinity never ever made any sense.
Now, anti-Krugmaniac realist economics has a very valuable policy implication, which is: "frictional problems" are incredibly painful. So, don't waste money in the first place. More specifically, the spending of a population is based on its wealth. In the long run, its wealth is mostly a function of its human capital (i.e., the population's ability to earn money). So, don't debauch the average human capital of your population.