Tuesday, March 10, 2009

Krugman is Still a Dweeb

Let me first start with his latest editorial complete {since short}.
Japan reconsidered
For a decade or so Japan's lost decade has been the great bugaboo of modern macroeconomics. Economists constantly warned that you mustn't do X or you must do Y, because otherwise we'll turn into Japan. And policymakers congratulated themselves in advance for not being like their Japanese counterparts, who dithered and drifted, refusing to make hard decisions.

Well, I'm sure I'm not the only person to notice this: Japan doesn't look so bad these days.

For one thing, the famed sluggishness of Japanese policy — the refusal to face up to banking system losses and pour in the funds needed to recapitalize the system, the refusal to let zombie banks die, the stop-go nature of fiscal policy, with concerns about rising debt warring with concerns about the economy — all of that seems entirely comprehensible now, doesn't it? Even with the knowledge of what happened to Japan to motivate us, so far we're following exactly the same path.

And given what the next couple of years are likely to look like, Japan's lost decade — yes, growth was slow, but there wasn't mass unemployment or mass suffering — is actually starting to look pretty good. We may or may not be about to face our own lost decade, but the sheer misery millions of Americans will face in the near future probably exceeds anything that happened in Japan during the 90s.

I still hope we can do better than the Japanese did, but it's not at all obvious that we will.
I find it funny that he can say with a straight face that "we're following the same path", when he understands that we have done them differently just maybe not as "big push" as he would want us to. Including the fact of "quantitative easing" that Japan did not start until 2001.

But if it was not so bad as in: "Japan doesn't look so bad these days." Then one has to wonder about a couple of his articles he has written before. He does seem to have studied the "lost decade" to understand it more than most economists. First: Setting Sun Japan: What went wrong?
By Paul Krugman

But the new story is much more interesting than the old one. How could a wealthy, productive, sophisticated country have gone from enviable growth in the 1980s to stagnation in the '90s, and now be slipping into a downward spiral of recession and deflation? True, Japan is not a country on the edge of chaos--as Indonesia or Russia is--but that only adds to the mystery. Japan isn't a place where the state is weak, unable to collect taxes or convince investors that their property rights are secure. Nor is it a country at the mercy of skittish foreign investors who must be persuaded to roll over its debt: Japan is still the world's largest creditor. So what's the explanation?

Inefficiency? Japan has many inefficiencies that limit its productive capacity--too many mom-and-pop stores, not enough computerization in the office, and so on--but inefficiency per se is not the immediate problem. What Japan lacks right now is not supply but demand: Japan's consumers and investors just aren't spending enough to keep the country's shops and factories busy.
And the usual remedies for inadequate demand aren't working. Interest rates have been pushed down almost as far as they can go. Like the Fed, the Bank of Japan normally targets the interest rate on overnight loans that banks make to each other. The difference is that this rate is more than 5 percent here, but basically zero there. The big public spending projects the Japanese government launches every now and then do create some jobs, but they never seem to yield enough bang for the yen: The economy keeps relapsing, while government debt keeps mounting.

Now you could argue that the experience of the Depression and after provides just such evidence. Many economists thought that with the end of World War II spending the United States would revert to Depression-type conditions; a whole school of thought, the "secular stagnation" hypothesis, was built around that idea. In fact, once jolted out of depression, the U.S. did not fall back; one explanation is a story something like that in Figure 2.

But it is quite a stretch to argue that Japan in the 90s is a parallel case. It might be; but an at least equally, if not more, plausible story is that Japan has a structural excess of saving over investment, even at a zero interest rate; in that case a temporary fiscal stimulus will produce only temporary results.

What continues to amaze me is this: Japan's current strategy of massive, unsustainable deficit spending in the hopes that this will somehow generate a self-sustained recovery is currently regarded as the orthodox, sensible thing to do - even though it can be justified only by exotic stories about multiple equilibria, the sort of thing you would imagine only a professor could believe. Meanwhile further steps on monetary policy - the sort of thing you would advocate if you believed in a more conventional, boring model, one in which the problem is simply a question of the savings-investment balance - are rejected as dangerously radical and unbecoming of a dignified economy.

Will somebody please explain this to me?
Hey, well he can always change his mind, but it seems that at least he should acknowledge his change in positions and that maybe he was giving the wrong advice either then or now.



Post a Comment

Links to this post:

Create a Link

<< Home