Krugman's First-Best is only Second-Best

"The ... economic problems facing both the United States and Europe have been quite straightforward and comprehensible....

Except that all the natural answers to our problems have been ruled out politically. Austerians not only block the use of fiscal policy, they drive it in the wrong direction; a rise in the inflation target is impossible given both central-banker prejudices and the power of the goldbug right. Exchange rate adjustment is blocked by the disappearance of European national currencies, plus extreme fear over technical difficulties in reintroducing them.

As a result, we’re stuck with highly problematic second-best policies like quantitative easing and internal devaluation. ... In case you don’t know, “second best” ... comes from a classic 1956  paper by Lipsey and Lancaster, which showed that policies which might seem to distort markets may nonetheless help the economy if markets are already distorted by other factors....

But here we are, with anything resembling first-best macroeconomic policy ruled out by political prejudice."

That was from Paul Krugman via Economists View.

Mr. Krugman sees distortions as the fundamental failure of markets to address social problems -- as opposed to rigidities in the structure of markets which must be overcome. It is therefore not surprising that Krugman's first-best policies, or those intended to address market distortions, are really second-best policies. This is because government expenditures and currency manipulations create new market distortions instead of removing existing ones. Whether or not the additional set of market distortions on top of the existing set is preferable isn't really the question, it is still a second-best policy.

Calling the economic problems facing the US and Europe as "straightforward and comprehensible," when they are anything but, further demonstrates Krugman's conceited disposition. He must have forgotten that the "curious task of economics is to demonstrate to men how little they really know about what they imagine they can design."