The problem I see with claiming that the model is wrong is that, well... the model isn't wrong. Sure, maybe one day our economic policies will shift away from capitalism, but we are a capitalistic nation (though with some unfortunate socialistic leanings IMHO). The reason why economists can apply practically the same methods to the 21st century as they did the 20th is that there is no real difference in the fundamentals of the economy have not changed. We still operate in a capitalistic society where supply and demand create (relatively) efficient generation of wealth. Sure, you can buy things on eBay and the like, and transactions on the stock market are now digital, but the market still fundamentally behaves in the same way.
Krugman and other macroeconomists do not generally dispute those commonly-held microeconomic assumptions. Where they differ, and what the original article is referring to when he says "Keynes vs. Friedman", are in the macroeconomic models. Macro is tricky because 1) we cannot ethically run controlled experiments on the economy, and 2) there are way too many parameters one could include. Macro is a useful but very approximate science; no serious economist would tell you that these models are without flaws.
I think economic models are largely independent of the environment. Saying "these are 20th century models applied to 21st century economics" is a bit like saying "these are 20th century physics applied to a 21st century world" - yeah, but physics hasn't really changed that much.
Put differently: 21st century/internet has not changed the wiring of the economy, only the parameters. So the old models (if they are good) still apply, just stick different parameters in there. A parameter being something like "cost for finding a matching product for my needs".
Back home, (ex-communist country), at the early 90s, the infrastructure was in pieces. I remember it took about 1.2 hrs, to travel 30 miles between the two biggest cities (one is a port, the other is the capital), of the country, on a two lane windy road. It was prone to accidents, traffic, frustration (every time when we wanted to go to the beach it was clogged).
The gov. had no money. It had to borrow some from FMN, and foreign dona tors, and build a highway, a modest 4 lane highway. That 70 minutes turned in to 25-mins. Transport became much much easier, faster, and traffic manageable. And shipments a lot easier.
The huge relief that came from the new road war worth the interest on that borrowed money, (money my government didn't have at the time), paid and more.
If you spending on things that have clear future net economic output, there is nothing wrong with borrowing from future income.
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The problem is when the government borrows money (from future generations output), on dubious projects, or even worse, WARS.
The Author said "So Obama will spend upwards of a trillion dollars of stimulus in a combination of tax cuts, building roads, bridges, and hopefully public transportation. And it can't hurt and maybe it will help." I can think of plenty of ways this could hurt.
Obama could create new entitlements that burden America for generations. The money could be used to prop up failing businesses, creating a situation where success is determined by who has the best lobbyists.
Not every loan is a bad idea, but plenty of them are. There is no guarantee the effect of this loan will be positive.
And by setting a precedent for bailing out bad businesses not only are the people who have to pay for this hurt, but everyone in the future because businesses will be encouraged to be corrupt rather than produce goods.
This is like in the prisoners dilemma, but you force the American people to not rat anyone out - so the corrupt businessman can get all the benefits at the cost of the American people.
Also, who are we taking a loan from? China already owns most of America; now the Federal Reserve is just printing more money to make it look like the government can spend the money - but the reality is, it is just a redistribution of wealth from those who hold cash (middle class, and rich people can invest in other assets) to whoever the government mandates "needs" it. (The way they define needs, is if you are so bad at running your business it is on the verge of bankruptcy, so you need a ton of cash to go have a relaxing vacation costing millions.)
Linking to a Wikipedia article does not in any way answer my question.
You've presented a possible reason why borrowing money to bail out corporations could be harmful, but you haven't demonstrated that it's worse than the alternative. Sure, bailouts are bad. So are depressions.
Quote: Government debt is typically paid back at some point. What makes you think it won't be this time?
Answer: As of November 19, 2008, the total U.S. federal debt was $10.6 trillion.[2], with about $37,316 per capita (that is, per U.S. resident). The October 3rd, 2008 bailout bill (H.R.1424), section 122, raised the U.S. debt ceiling from $10 trillion to $11.3 trillion. Of this amount, debt held by the public was roughly $6.3 trillion.[3] In 2007, the public debt was 36.8 percent of GDP [4], with a total debt of 65.5 percent of GDP.[5] The CIA ranked the total percentage as 27th in the world.[6]
36.8% of our GDP. Okay. How are we paying that off if every year the deficit only grows?
In addition, you said depressions are bad but they happen. And yes they're market failures and natural periods of economic purge.
But bailouts are different - they basically stop that market failure that should have happened to happen. A bailout is a subsidy. Then companies that shouldn't be able to compete continue to do so, and that leaves room for more problems in the future.
How are we paying that off if every year the deficit only grows? You can effectively pay back the loans even with a deficit.
36.8% of GDP payed back at 1% per year would be (Interest - inflation - 1%) = ~.03 * 36.8 = 1.14% of GDP. Which is bad but below the average annual increase in GDP over the last 30 years. The deficit would increase every year, the debt would increase every year, but debut as a percentage of GDP would decrease.
One of the failings of democracy's is it's so easy for people in office to pay for current spending by increasing debt and then pass the buck to the next administration. The real story about the deficit is graphing as a percentage of GDP over time, doing so tells a different story than you might expect. http://zfacts.com/p/318.html
