In a Charlie Munger interview he discusses the necessity of social virtue for Keynesian policies to work. Societies like ours, the Germans, or the Japanese have the virtues required for Keynesian stimulus to work. Greece on the other hand lacked these essential virtues, lost its work ethic and abused the government bounty let loose on the populace. In such places Keynesian policies will not work.
To the extent we have lost some of our social virtues, Keynesianism works less well that it used to. To the extent Krugman underestimates the ‘sin ratio’ his faith in Keynesianism is misplaced, though he remained generally complimentary of Krugman otherwise. (Perhaps he is referring to Krugman’s research on international trade more than his tirades at The New York Times?)
The looming question is what causes the decline in virtue. Is it the secular transition so many western democracies experienced? Is the growth in government transfer payments leading more and more to rely less on their individual abilities at fault? Is it the rise of crony capitalism where government rather than consumers and entrepreneurs drive economic opportunity; using political power to allocate capital rather than market efficiency and effectiveness?