… in this case they haven’t yet resorted to the (d) option: (d) its racist.

Maybe they are holding that one in reserve for when intelligence and history once again prevail over Hope and Change.

and Krugman’s views on how to deal with the present crisis. See Krugman, for example, a week or so ago, arguing that we’re in a “Keynesian moment” and that “monetary policy could do no more” to address the current crisis. Krugman seems to be arguing to a return to Keynesian policy now–government spending as stimulus instead of hoping the Fed can do the trick alone.

Krugman’s blog post as of recent have been very Keynesian. Here is one recent post:

The Keynesian moment

Greg has this exactly right:

IF you were going to turn to only one economist to understand the problems facing the economy, there is little doubt that the economist would be John Maynard Keynes. Although Keynes died more than a half-century ago, his diagnosis of recessions and depressions remains the foundation of modern macroeconomics. His insights go a long way toward explaining the challenges we now confront.

I think it’s worth saying a bit more about why, exactly, we’re in such a Keynesian moment.

The Greg he is referring to is N. Gregory Mankiw, the former chairmen of Bush’s council of economic advisors.

No one, including Krugman, would say that monetary policy is useless. Every mainstream economist sees the value it has in maintaining economic stability and counteracting the business cycle. The problem is that all the Fed can do is lower interest rates. Right now, those rates are dangerously close to the zero boung.

Fed Funds Rate is 1%
Discount Rate: 1.25%

3-Month T-bill: 0.005%

In a very basic economic model, GDP = C + I + G. That is, total output is equal to consumer spending + investment + government spending. The idea is that when GDP starts dipping, by decreasing interest rates you increase consumer spending and investment. The idea behind government spending being bad is that it will “crowd out” investment. In our present situation, C and I are falling like crazy, and with interest rates being near zero as it is, there simply aren’t enough rate cuts left to prop them up (and if we get down to zero, the panic of hitting the zero bound may make things worse). No one is advocating fiscal stimulus as the first and best option, they are advocating it as our last and best hope.

Whether you think that stimulus should come in the form of tax cuts, stimulus checks, or infrastructure projects is open to debate. The previous rounds of stimulus checks didn’t seem to do much, and even Obama is talking about scrapping (or delaying) his plan to reverse the tax cuts on the upper income brackets.

I’ll butcher the ideas a bit for the sake of brevity, but this is really a debate between demand and supply side economics.

Supply side economics basically says that consumers will buy (demand) whatever producers supply. Thus, the trick to a strong economy is to promote the businesses that make stuff. Demand side economics basically says that producers can only supply whatever consumers are willing to buy (demand).

So one must ask themselves, where is the failure? Are businesses unable to produce, or are consumers unwilling to buy? (reality is really a mixture, but I said I’d butcher things a bit). If you believe that producers would be fine if only there was a demand for their stuff and that demand isn’t coming from consumption, then you might conclude that its best for the government to step up and create the demand itself by spending (ie, buying) stuff. If it buys things that can increase future productivity (like upgrading our roads, bridges, power grids, telecom, etc.) then, in the long run, this government spending may actually be beneficial to our overall productivity while also filling in the spending gap caused by the decreases in consumer and investment spending.

This post has been thoroughly debunked by
Hilzoy at Obsidian Wings. If you’re going to accuse others of intellectual laziness, it’s best not to make it look as if Krugman is commenting on the current slump when all of Henke’s quotes come from 2001. Krugman has been very clear on his view of what’s needed in the current situation, and it’s just the opposite of what PY claims.