1. Simple economics is not simplistic economics. The key, of course, is to get a version of "simple" that explains a great deal. If it can't do that, it is probably "simplistic". If it can do that, it's a good model. We are not physicists. We are modeling processes and mechanisms - we are not replicating the economy in a computer. That's impossible. I think a lot of different schools of thought have a lot of very important things to say, but the reason why I think of myself as a "Keynesian" is that a simple Keynesian model explains several orders of magnitude more about this crisis than any other model out there that I've come across, and when we approach episodes of a very different nature (like 1920-1921), there's nothing that Keynesianism says that is contradicted by those episodes. You need both of those elements for a simple model that works: the ability to explain a lot in times that it matters, and the ability to avoid contradicting the evidence when your explanation is somewhat less relevant.
2. Gadgets in models are not the heart of models. Here, Krugman is criticizing people that emphasize mere gadgets too much, but this is also what bothers me about a lot of critiques of mainstream models because of their gadgets. Modeling conventions like CES utility functions, Ricardian equivalence, and different discounting and intertemporal decision making assumptions are used to structure models. I don't believe Ricardian equivalence strictly holds. I don't think anyone does. But the question is, if we're writing up a simple model of an economic process, should our first approximation be Ricardian equivalence or not? The first approximation should absolutely be Ricardian equivalence. Now - if you're result depends on the strict truth of Ricardian equivalence then you need to recognize that you have a problem, because Ricardian equivalence is a gadget in a model - it's not the reality of things. But the point is if people have tendancy toward rational behavior it makes more sense to model them behaving rationally and then loosen assumptions than it does to abandon the formal modeling project altogether. It's a judgement call in a lot of cases, but it's very frustrating to get criticized for these modeling assumptions by people who don't really understand how mainstream economists think about modeling assumptions. And you get that sort of criticism from both the libertarians and the lefties.
Reforming Corporate Taxation
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