Krugman’s first claim is harmless enough. Obviously, an overall lack of demand can hurt the economy, those who erroneously insist that supply is always capable of creating demand notwithstanding. His second claim is partially true, but incomplete, because not all spending comes from income. A considerable amount of spending also comes from credit, but since that is neither part of the Neo-Keynesian aggregate model nor the babysitting coop story, Krugman simply omits it. And it can’t be denied that the babysitting coop did appear to get out of its impasse by printing more coupons.
However, Krugman is guilty of a significant omission when he claims that Fed inflation – cranking up the printing presses – worked spectacularly in ending the 1981-1982 recession. And what he omits is that one of the chief causes of the recession was the Fed’s need to slam on the brakes due to the rampant inflation of the 1970s, inflation that completely failed to cure the high rates of unemployment as it was supposed to according to conventional Neo-Keynesian economic theory. In fact, it was this failure that led to the widespread rejection of Neo-Keynesianism and the adoption of Milton Friedman’s monetarist spin on it.
Also, when Krugman claims that the Fed was cranking up the money presses in 1983, he omits to mention that throughout that year, which more than covers his “few months” the interest rate never fell below 10.5 percent, which is higher than it was at any time after November 1978! Somehow, we’re supposed to believe that observably tighter monetary policy amounts to cranking up the money presses!
Krugman has long ceased to be a legitimate economist, and is now nothing more than an economics ideologue.