Krugman Explains How He Came to View Financial Crisis Differrently

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Krugman, is seen as a radical economist, particularly by those who know nothing about economics. His views on a couple of topics are also slightly different from those of economists who do understand economics. He believes that he learned a couple of things from his experience with prior crises in the 1990's that changed his thinking about conventional approaches to economic downturns. He explains those experiences in this article.

Most economists had come to believe that conventional monetary policy had solutions to most of our economic problems. The Asian Crisis in the late 90's showed that conventional monetary policy could not solve the economic problems for countries with their debt denominated in foreign currencies. It was necessary to use capital controls to limit the flow of foreign capital into these countries to stabilize their economy's and to prevent future problems from currency speculators. Most economists are opposed to restrictions on the free flow of capital across international borders.

His experience with Japan's long-term recession taught him another lesson. Monetary policy was used to bring interest rates down to zero and it had no effect on economic growth. He became more of Keynesian when he realized that fiscal policy was the best way to stimulate an economy that was caught in a liquidity trap. Conventional monetary policy, which has a focus on interest rates, is not useful when interest rates have fallen to the zero boundary.

Krugman believes that these two changes in his viewpoint explain the major differences between his views on our current situation and those of most economists who are opposed to capital controls and the use of fiscal policy. I believe it goes deeper than that. Krugman also has a value system that may be less common among economists and especially among conservatives. He believes that conservatives want to restore our country to what it was like before the New Deal. He believes that we had a better country in the post war period prior to the Reagan era when conservatives began their attack on the institutions developed in the New Deal. They want to use government to benefit those most able to influence government to their advantage. One of their tactics is to convince others that government is the problem and not the solution. They do not seek to destroy the state, their view of the state is best described by Jay Galbraith in his book "The Predator State".