Krugman's thorough, well-researched piece "How Did Economists Get It So Wrong?" can overlook the obvious. In essence, his piece is a history of modern macroeconomics that seeks to explain why economists didn't see this recession coming (and didn't even think it was possible). His account of economists is not inaccurate, but his piece fails to consider any factors outside of economic activity, strictly speaking, that might have lead us to where we are today.
Principally, he overestimates the influence of economic policy, while underestimating the impact of outright criminality and our relationship to such problems as global warming, oil, and water shortages. He also misidentifies the problem -- it is not that the economy is shrinking, it's that American economic and political philosophy prevents us from thriving, or even care for people on a basic level, despite a shrinking economy.
He points out that regulators -- the SEC, for example -- didn't really regulate. But he keeps this within the realm of economic theory -- when free markets are too free. But what if the regulators, in collusion with (or under the illusion of) wealthy investors, businesspeople, and politicians simply stole massive amounts of wealth. In short, at what point do we consider the manipulation of laws and markets for the sake of personal gain to be the equivalent of tyranny? At what point does economic theory cease to matter, because you literally have people dipping into the coffers at the public expense?
An analogy: Imagine someone overthrew our country using military force. Would Krguman, in that case, bemoan the failure of economists to prevent our nation's collapse? Of course not. Yet it's difficult to look at the current relationship between the wealthiest people in this country and the lawmakers as all that different from tyranny -- just how much of our wealth has been frittered away by thieves with the ability to manipulate government and financial institutions? At what point does such activity circumvent economic policy?
Then, there's the problem of growth. Our version of capitalism doesn't deal well with a shrinking economy. For most people -- common people -- an adequate social safety net is more important than a growing economy. If people were 100% sure they would be provided for (a decent home, food for their family, health care, etc.) even after being laid off, a shrinking economy wouldn't be such a big deal. What if our population continues to grow, our natural resources continue to shrink, and no significant new markets are opened? But, what if, at the same time, we still have more than enough to ensure a decent standard of living for everyone in this nation? Yet we are flummoxed by such a seemingly manageable situation.
While the infrastructure of our nation certainly requires work, it's entirely possible that there are simply not enough jobs to provide everyone with a 40 hour work week. Political cartoons joke (and politicians actually say) that it's our duty, as Americans, to shop. In any case, the media, and I think actual people, are concerned that there isn't enough "economic activity." Clearly we are manufacturing a demand for labor by encouraging consumption. When there is no authentic demand, the means through which we create demand can be devastating -- war being the most obvious, but overproduction having perhaps the most dire economic consequences.
We need to start addressing more fundamental economic questions. Not "How do we grow our economy and increase our wealth," but "How much does it take to ensure everyone is healthy," "At what rate should we consume natural resources to give ourselves the best chance of survival." In short, Krugman misidentifies the problem -- it's not that economists failed to prevent this economic collapse. The economic collapse isn't the problem -- it's the fact that we can't deal with a contracting economy when a contracting economy may be the solution to many of our problems.
I think it's naive to look at the housing bubble, or any bubble, as fundamentally an economic problem. Obviously, all economic behavior is human behavior. It's striking that we act as if all this talk of the coming apocalypse (i.e. global warming, water shortages, oil shortages, etc.) doesn't affect people psychologically. Likewise, it's increasingly clear that we use the fantasy football league known as the stock market, alongside shopping, to distract ourselves from these very real problems. If the American Middle Class way of life can be saved, we're doing OK, so the current thinking goes. Deep down we all know this is nonsense. We know the changes in our economy, regardless of their proximate cause, should indicate that we need to fundamentally rethink our priorities.
I like Krugman, but he needs to start connecting the dots.