At the NYT today (thanks Bill Stepp), Krugman has a post defending what he calls his macro model and arguing that folks who oppose easy money/negative real rates/raising expected inflation are guilty of ad hoc arguments to justify their "predjudice" (which is presumably coming from somewhere irrational) against easy money. Here is the model Krugman is working from:
Notice the inverse relationship between interest rates and aggregate demand. Krugman argues that the economy "wants" negative real rates so it can hit the point where that demand curve crosses the full employment line, which is below the zero interest rate line.
There are so many problems with this from an Austrian perspective that it's hard to know where to begin. The biggest is that there's absolutely no notion of capital or the idea that production takes time here. There's no way to distinguish between consumption and investment - it's all part of AD or Y. Lowering the interest rate just gets us more demand for "stuff." The fact that it might skew the kind of stuff that gets produced toward the early stages of longer-term production processes in ways that are not sustainable never enters the picture. The fact that with heterogeneous capital goods, even given idle resources, one cannot assume that C and I will move directly together and not opposite each other never enters the picture.
Nor does this enable us to see how the negative real interest rates of the boom of the last decade gave us tons of malinvested capital from which we are still trying to extract ourselves. Can this model, which he uses all of the time, explain the various features of the boom and how it turned to bust? The other sorts of distortions that inflation might create that are also damaging to economic growth and employment are never considered.It's a model with no price level, no time, and no capital. It's the worst of Keynesianism in one picture.
But it is all nice and simple this way and anyone who disagrees with Krugman is making it up as they go along to satisfy some irrational prejudice.
No Paul, not really. The basic Austrian model has been around for close to 100 years (if we go back to Mises in 1912) and it's done fairly well in explaining why things go wrong, including the current boom and bust. That's not ad hocery, nor is it a prejudice. It's the consistent application of a theory that's been around longer than yours.
If you disagree Paul, lay out your objections, but to argue critics of further monetary expansion have no theory and are just justifying a prejudice is to reveal your own ignorance of alternative perspectives and continue in your typical ad hominem style.
Frankly, with the failure of the stimulus, it seems like if there's ad hocery anywhere it's in Krugman's corner of the world.
If you were skeptical that the Austrian view of capital is central to the differences between how Austrians view the macroeconomy and how many other economists do, Krugman gives you some evidence to consider.