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However, this paper attempts to show that Krugman’s ideas are somewhat simplistic and cannot be applied in the modern economies.
First, Krugman argues that in order to recover from the effects of inflation and ensure sustainable growth, it is important to aim for “moderately higher inflation” of around 4 percent (Krugman, 219). According to him, inflation helps to lower the value of debts such as mortgages which cause depression. This will in turn cause the economy to recover. One factor overlooked by Krugman is that inflation in itself will cause other problems that will significantly affect the growth of the economy. For example, higher inflation rates would mean that the price of domestic products will be high, and this will make the US unattractive to other countries in doing business. The total value of exports will be reduced. Considering the US and most of European countries rely on exports, inflation will simply lead to slow growth. The real problem is not in the lack of demand but the lack of adequate production. Unfortunately, this cannot be addressed by increasing the money in the economy. This approach as proposed by Krugman will lead to trade deficits.
Secondly, the author also focuses on the issue of debt, and argues that the effect of deficits for the American economy is “for the most part, hypothetical”. He argues that the burden caused by debt is less compared to that caused by unemployment. He does not believe in the idea of a debt crisis. However, it can be argued that an increase in debt does not help to increase the quantity of productive capital. Increased debt will in fact lead to some “fictitious capital”, and this can only address the problems in the short term. In the long term, the amount available for the private sector to save is greatly reduced, and this will lead to slower economic growth. As a result, few job opportunities will be created, and the same problems will resurface. It is no doubt that US
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