I don’t know what I would do without Paul Krugman and his unerring ability to get things wrong, but bless him, there he is again.
Krugman doesn’t get quite understand any of this, but he does come close. The issue between the classics and the Keynesians over why recessions occur was over whether they were due to structural imbalances or demand deficiency. We live in a world where lack of demand is now the accepted truth which Krugman does go on about, although of all things, by first noting the structural imbalances that now exist.
The pandemic really did produce an Austrian-style reallocation shock, with demand for some things surging while demand for other things slumped. You can see this even at a macro level: There was a huge increase in purchases of durable goods even as services struggled….
We’re finally having the kind of economic crisis that people like Hayek and Schumpeter wrongly believed we were having in the 1930s.
Of course, the reason we are in recession right now is because our governments have shut much of the private sector down as an act of policy. Entirely insane, and we will pay for this and in no uncertain terms, which Krugman even kind of notes in his very last line which is really the central point of this post.
And in case you’re wondering, the Fed, by accepting transitory inflation, is getting it right.
You’ve been warned. Inflation is on its way. What to do about it I have no idea. Our governments will eventually be coming after us for all the money they can put their hands on. Transitory of course means that this inflationary period will end, eventually, but when that might be is anyone’s guess. Saving us from the Chinese flu will not have come cheap.