In fact Mark, I had read his thoughts on the liquidity trap (and I thought they were pretty good, which shouldn't be confused with I thought they were original). Indeed, during my visit at the BOJ in 2002, I offered some of my own speculations on the matter (see here). Here is a quote from that piece:
I conclude with some thoughts on the potential role for fiscal policy. Some economists, notably Krugman (1999) and Eggertsson (2002), have advocated the use of fiscal policy as a means of “stimulating” the economy when it finds itself in a “liquidity trap” scenario. The model that I present below is consistent with this idea. In particular, by increasing the rate of expansion of nominal government debt, the fiscal authority can drive down the expected real rate of return on government securities (by increasing the expected inflation rate), thereby inducing asset substitution from government securities into capital investment. However, whether such a policy is likely to have a quantitatively important effect and whether such a policy would even be desirable in terms of economic welfare are still questions open to debate.
Open to debate, that is, as far as I was concerned. Not to (the post Nobel prize) Krugman, or any of his devout followers.
So Krugman "discovered" the liquidity trap in 1999? He discovered the proposition that a swap of two zero-interest bearing securities (money and government debt) is not likely to have a significant impact on the wealth portfolios of individuals? Well done (but wasn't this known already?).
What I find insufferable about the man is not that he is necessarily incorrect; it is the manner in which he proclaims things to be absolutely true (something that I don't detect in his earlier writings). Even worse is the faint, but unmistakable hint that the reader is a moron for not capitulating at his alter of higher wisdom.
What do I mean by this last statement? Well, take a look here, for example. That's for all of you stupid PhDs who cannot understand how a sticky price model works. You see, just assume that free markets do not work well (prices are sticky). Then you assume that the government works really well. Homework: deduce the correct policy implications.
Another irritating aspect of the man is the way he likes to label the assumption of sticky prices as a Keynesian construct. What is irritating is not so much that he does this (as do almost all NK types); it is that he frequently berates others (notably Barro) for not reading the General Theory properly (or at all). Well, here's a quote from the General Theory for all you NK fans:
In this summary, we shall assume that the money-wage and other factor costs are constant per unit of labour employed. But this simplification, which we shall dispense later, is introduced solely to facilitate the exposition. The essential character of the argument is precisely the same whether or not money wages are liable to change. (Chapter 3, Part II)
In other words, the assumption of sticky prices/wages has absolutely nothing to do with Keynes' theory. In fact, he would argue later on that to the extent that prices/wages are sticky, that this would be good thing (it would prevent a further fall in incomes that would serve to exacerbate any demand deficiency).
Mark pointed me to this Krugman piece, which I had not seen before (thanks, Mark). Evidently, one thing that has really been "bothering" Paul is the absence of "fully worked out models." In light of his history of coming down hard on one side of this debate, I can hardly believe that he is being sincere. But maybe he is, and maybe I've been wrong about the guy.
I'll have more to say once I finish reading it carefully.
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