A few days ago Krugman made a speech on receiving a Honorary Degree from a Portuguese University. The title was: “Economics in the Crisis”. It´s a spirited defense of the IS-LM model, in particular as it pertains to the present slump, given that the economy is at the ZLB:

But economists who knew basic macroeconomic theory – specifically, the IS-LM model, which was John Hicks’s interpretation of John Maynard Keynes, and at least used to be in the toolkit of every practicing macroeconomist – had a very different take. By late 2008 the United States and other advanced nations were up against the zero lower bound; that is, central banks had cut rates as far as they could, yet their economies remained deeply depressed. And under those conditions it was straightforward to see that deficit spending would not, in fact, raise rates, as long as the spending wasn’t enough to bring the economy back near full employment. It wasn’t that economists had a lot of experience with such situations (although Japan had been in a similar position since the mid-1990s). It was, rather, that economists had special tools, in the form of models, that allowed them to make useful analyses and predictions even in conditions very far from normal experience.

It´s a long post but the paragraph above gives the gist of it.

Krugman´s insistence on “fiscal stimulus” has not only done harm (bringing forth worries about fiscal sustainability, for example) but has shown itself to be quite ineffective (the counterargument here is that it wasn´t “large” enough).

Given Krugman´s “love affair” with the liquidity trap, he was quick to dismiss monetary policy as an alternative:

Now what? The answer should have been simple, and backed by an overwhelming consensus. The immediate problem was a huge shortfall of demand, as the private sector moved from large financial deficit to large financial surplus. To avoid terrible effects on output and employment – effects that would only magnify the problems of excess leverage – we needed not just a rescue of the financial system but also strong government action to support demand while the wreckage was cleared. What kind of action? There was and is a case for large-scale unconventional monetary policy, which in a zero-bound economy has to work largely through inflation expectations. But the more proximate tool, with the greatest known effectiveness, was fiscal policy, especially increased government purchases of goods and services.

My counterfactual thought experiment is to imagine what would transpire if from the start Krugman had posited the importance of monetary policy, even at the ZLB. After all, he´s well aware of, among others, Lars Svensson´s “Full Proof way out of the LT”. In this case, instead of saying that “increased deficit spending would not increase interest rates, Krugman would argue that increased “monetary stimulus” would not (measurably) increase inflation”. The Fed could, for example, set a nominal GDP level target, something that Krugman has commented on positively:

As I see it — and as I suspect many people at the Fed see it — the basic point is that to gain traction in a liquidity trap you must either engage in huge quantitative easing, raise the expected rate of inflation, or both. Yet saying this is very hard; people treat expansion of the Fed’s balance sheet as horrible money-printing, and as for the virtues of inflation, well, wear your body armor. But say that we need to reverse the obvious shortfall in nominal GDP, and you’ve found a more acceptable way to justify huge quantitative easing and a de facto higher inflation target. Don’t call it a deception, call it a communications strategy. And as I said, I’m for it.

I´m pretty sure that the effect would be much more positive and the action itself much less “traumatic”. Unfortunately in “pushing” for “fiscal stimulus”, Krugman caused “schisms” in the profession (the “saltwater-freshwater” divide, for example), with the practical result that “nothing is done”.