(ms-word version). Later published in Economic Affairs 31:36-40 (2011) (local pdf). A response to Paul’s New York Times Magazine article. Bloomberg TV Video interview on the post. David Levine wrote a good open letter in a similar spirit. Note: This is just a response to Krugman’s article. A number of people have criticized me for not explaining the alternative, i.e. just what does modern macro and finance have to say about the crisis, exactly what do good models of fiscal stimulus predict, and so forth. Sorry, there’s plenty to say, but that’s a much bigger essay. See the rest of this webpage! Here's the most delicious quote, I think:

"If you believe the Keynesian argument for stimulus, you should think Bernie Madoff is a hero. He took money from people who were saving it, and gave it to people who most assuredly were going to spend it.  Each dollar so transferred, in Krugman’s world, generates an additional dollar and a half of national income.  The analogy is even closer. Madoff didn’t just take money from his savers, he essentially borrowed it from them, giving them phony accounts with promises of great profits to come. This looks a lot like government debt.

If you believe the Keynesian argument for stimulus, you don’t care how the money is spent. All this puffery about “infrastructure,” monitoring, wise investment, jobs “created” and so on is pointless. Keynes thought the government should pay people to dig ditches and fill them up. 

If you believe in Keynesian stimulus, you don’t even care if the government spending money is stolen. Actually, that would be better. Thieves have notoriously high propensities to consume."

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