It strikes me as not productive to say that all we have done is a complete waste. The profession is extremely competitive. If you have a better idea, it's going to win out.Krugman should take that to heart. As usual, here, he sees himself as the King of Prescience:
More specifically, we knew all about liquidity traps, and had at least thought about balance-sheet crises, a decade ago.In fact, liquidity traps have been well-known to monetary economists for some time. Twenty years before Krugman thought about liquidity traps, Charles Wilson wrote this paper, which tells us most of what we need to know about the phenomenon:
“An Infinite Horizon Model with Money,” in General Equilibrium, Growth and Trade, edited by Jerry Green and Jose Scheinkman, Academic Press, New York, 1979, pp.81-104.Krugman also says this:
It’s true that if you bought completely into rational-expectations macroeconomics, the crisis in the economy should be causing a crisis in your faith —Now, the people who "bought completely into rational-expectations macroeconomics" would be essentially the whole profession. Krugman of course is stuck in 1978. He doesn't realize that Keynesians, new classicals, and whoever else, "bought in." This is what Woodford, Gertler, Gali, Kiyotaki, Lucas, Prescott, and all of the rest of us, do. There is no crisis of faith, only pressing and interesting problems to work on.
The WSJ guy finishes with this:
Many economists think the next big idea will more likely come from the ranks of younger Ph.D candidates, who are producing reams of work examining the financial crisis. Established academics—such as Mr. Gertler, Nobuhiro Kiyotaki of Princeton, Marcus Brunnermeier of Princeton, Michael Woodford of Columbia and Robert Hall of Stanford—are making progress on including banks, financial markets and even a bit of irrationality in traditional models.I'm glad to hear that we are finally making some progress in getting banks and financial markets into "traditional" models. Of course, Gertler, Bernanke, yours truly, and Bruce Smith started doing that in the early 1980s.