In his recent column The Opposite of Stagflation Paul Krugman says that:
"One of the truly amazing (and disheartening) things about the Great Recession and its aftermath has been the continuing insistence of many economists that it’s somehow a supply-side slump, driven by the evils of Obamacare or something. This tends to come from people who view stagflation in the 1970s as having permanently refuted all things Keynes. So I guess it’s worth pointing out repeatedly that the recent slump shows all the hallmarks of a demand-side shock; in particular, rising unemployment has been associated with falling inflation — the opposite of stagflation."
"One of the truly amazing (and disheartening) things about the Great Recession and its aftermath has been the continuing insistence of many economists that it’s somehow a supply-side slump, driven by the evils of Obamacare or something. This tends to come from people who view stagflation in the 1970s as having permanently refuted all things Keynes.
So I guess it’s worth pointing out repeatedly that the recent slump shows all the hallmarks of a demand-side shock; in particular, rising unemployment has been associated with falling inflation — the opposite of stagflation."
So I guess its worth pointing out that the opposite of stagflation is not stagnation with low inflation, but high growth without inflation. But given it is Paul K. we'll grant that he is assuming inflation as a reference point in this. And in focusing in on the model battles, he is saying that we are indeed seeing stagnation, but there is deflation as his form of the Keynes model would predict. Huzzah!
Triumphant, because he would then go on to say, as he often does, that all we have to do is pour massive stimulation in from the fiscal side, and the demand side of the economy would recover as consumers could use their wages to purchase more goods. Problem solved.
And its a good piece of intellectual land to stake out, because no matter what the actual outcome in the real world, Paul will be able to argue that he was right if there is a favorable outcome, or if not, then it would have been favorable except that the government did not provide enough stimulus. I would be inclined to believe that even if stagflation does eventually show up, he will be able to argue that it was some other anomaly that does not affect his model. Alas, that Krugman is no Keynes, who changed his mind when the data changed.
This works for Paul because his focus is sufficiently narrow, which is the failure of most economic models to provide any actual benefit for the real world.
It allows him to almost completely ignore the facts on the ground, what really happened to cause the financial crisis, and what forces are at work to keep it stubbornly at work despite massive top down monetary stimulus by the Fed. His heart may be closer to the solution than the Austerians, but his mind is still carrying water for a system of learning, and a political mindset, that is more of an impediment to progress. This is what happens to a vibrant set of theories from an original mind like John Maynard Keynes suffer from the arteriosclerosis of dogmatism.
The Banks must be restrained, and the financial system reformed, with balance restored to the economy, before there can be any sustainable recovery.
h/t Yves Smith, et al.
