I missed this six months ago:

Julie Verhage: The Two Big Economic Policy Failures That John Maynard Keynes Would Be Disappointed by Today: “The famous economist isn’t around for us to ask him…

…but here is probably the next best thing. Robert Skidelsky… said… Keynes would have found two things upsetting. First, he would be frustrated with the lack of  precautions taken to prevent a huge financial crash like the one we saw in 2008. Secondly, Lord Skidelsky believes Keynes… would have wanted a more ‘buoyant response,’ he said.  Specifically, he doesn’t think Keynes would have liked the Federal Reserve’s quantitative easing….

We’ve been for many years in a state of semi-stagnation, and the recovery is still very very weak in the European Union. The actual recovery measures we’ve taken, particularly quantitative easing, have actually skewed the recovery towards asset buying and real estate, thus threatening to recreate the circumstances that led to crash in the first place. I think he would have been disappointed by those policy failures…

Skidelsky is certainly correct in saying that Keynes would be driven raving mad by the failure of central banks and other regulatory agencies to take seriously the task of managing and bounding the illusion of collective liquidity, in order to curb the dangers created by systemic risk. And he is correct in believing that Keynes would be astonished at counterproductive fiscal austerity and incoherent worries about debt burdens at a time of extraordinarily low current and projected future interest rates.

But I am puzzled by Skidelsky’s third. He believes that Keynes would have seen not a second- but a first-order loss in responding to tighter-than-ideal fiscal policy with looser-than-ideal monetary policy in order to hold aggregate demand harmless. Good Belsky does not, and to my knowledge nobody has succeeded in, producing a coherent simple model of what they mean. I am going to have to put this down as yet another example of a case in which smart, sensible people claim to know more and know different then what is in the simple file-and-communications systems that are our standard economic models.

I can see that responding to inappropriately-austere fiscal policy with easier monetary policy and lower interest rates than in the first-best creates a world with too-little government capital, too-low a level of social insurance spending, an inappropriately low level of government-provided safe assets, and on inappropriately-high level of long-duration risky assets.

What I do not see is why all of this is a first-order loss, and why it is worth opening up a significant Okun Gap relative to full employment and potential output in order to prevent these Harburger Triangles.

So, I am once again pleading for an answer, or an explanation, preferably in the form of a simple model I can wrap my brain around.