Krugman on Liquidity Traps

KRUGMAN ON LIQUIDITY TRAPS….Hey, not only is economist Paul Krugman a great liberal columnist for the New York Times, but apparently he’s a cool guy too. He reads blogs, mentions Demosthenes in his latest post on his personal website, indicates that he’s read Ender’s Game, and knows about Godwin’s Law. He’s one of us!

And speaking of economics, here’s a scary thought: despite all the talk about how the U.S. economy is the best in the world thanks to our dedication to small government, the free market, good morals, etc. etc., it’s well to remember that in the 70s Germany was widely thought to be the economic model for the future, in the 80s it was Japan, and in the 90s it was us. Maybe it will continue to be us for a while longer, but a decade at the top doesn’t prove it. George Bush’s horrible fiscal policy has the potential to cause considerable long term harm, and increasing income inequality could become our Achilles’ heel.

Krugman makes a similar point in this post, where he notes that Japan got caught in a liquidity trap in the 90s, despite broad opinion that liquidity traps were no longer a problem in modern economies, and it might happen to us too. He’s also got a somewhat more detailed explanation of liquidity traps and deflation here, explaining exactly what the problem is that he’s afraid we’re facing.

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