Remora
Paul Krugman is not my favorite economist. I think of him as the Economist from Glib -- he's absorbed monetary theory into a highly attenuated Keynsianism, resulting in that sweet sleep of reason, Clintonomics.

However, his article in the NYT Magazine this Sunday
is definitely worth reading, even if its potted history of How we learned to Make Macroeconomic Policy seems pretty suspect to me. He uses a military/ sports metaphor to adumbrate our two "lines of defense" against a Depression -- which, by the way, he defines wholly in terms of consumer demand. To quote from his article:

"The first line of defense against an economic slump is monetary policy: the ability of the central bank -- the Federal Reserve, the European Central Bank, the Bank of Japan -- to cut interest rates. Lower interest rates are supposed to persuade businesses and consumers to borrow and spend, which creates new jobs, which encourages people to spend even more, and so on. And since the 1930's, this strategy has consistently worked. Specifically, interest-rate cuts have pulled the United States out of each of its big recessions over the past 30 years -- in 1975, 1982 and 1991. "

...
"Behind the first line of defense is a second line, fiscal policy. If cutting interest rates isn't enough to support the economy, the government can pump up demand by cutting taxes or increasing its own spending. "

Notice the dates in the first quoted paragraphs. You'll notice that they correspond with the dawning of the age of Friedman (truly the age of acquarius for neo-classical economists)-- and that Krugman is not counting the slowdown of 59-60, or even the slowdown of 73-74. Moreover, it is, to say the least, not evident that interest-rate cuts "pulled" the United States out of these recessions. Interest rate cuts are responses to economic slowdowns, certainly, but the experience of, for instance the stagflation-slowdown that started in 1980 doesn't have the electric switch characteristics Krugman wants to convey. As a corrective to Krugman's views, William Greider's The Temple, which is a journalistic account of Fed decision-making, is recommended. I recommend it the more given Krugman's notorious contempt for Greider.

The problem with his analysis is in what he takes to be the second line of defense. Notice how he confines fiscal policy, in the traditional time-honored fashion of economists, in terms of discretionary spending over a short-term time frame. What is missing, here, are long-term governmental fiscal structures - such as college loans, FHA, on-going infrastructural support for highways, R&D, the environment, and the rest of it -- which are, I would contend, the enduring vector of government intervention in the economy which, as a structure (apart from its yearly budgeting) has generated a stabilizing influence on the economy. It is upon these structures that the American economy has built an internal consumer market fueled by debt. In his whole article, Krugman never mentions consumer debt, but it is crucial to understanding how our present economy differs from the economy of the 30s, and how the dangers of recession differ, too.

However, even if I find Krugman's frame of analysis inadequate, his rehearsal of the woes to which the Japanese economy is presently heir is pretty good, even if his idea that America, unlike Japan, has a much smarter central bank is pretty funny. This idea is widespread among American economists, and it has its roots in vanity. They recognize kindred spirits on the board of the Fed -- hell, they are kindred spirits, coming from the same universities, publishing in the same journals, using the same models. This doesn't really mean they are smarter. This simply means they share the same delusions -- like the Glass family in Salinger's short stories. You can only be so smart in economics, because, pace Krugman, it is not and never will be a positive science.