William A. Galston: The Case Against Keynes (With Some Questions for Krugman, Too)
[William A. Galston holds the Ezra Zilkha Chair in the Brookings Institution’s Governance Studies Program, where he serves as a Senior Fellow.]
As President Obama’s bipartisan fiscal commission gets set to convene, the Greek budget disaster has triggered the predictable flood of cautionary notes about how we’re spending too much and heading toward a debt crisis. Should these concerns illuminate the commission’s work—or are they merely alarmist?
Paul Krugman harbors no doubts: “Despite a chorus of voices claiming otherwise,” he writes, “we aren’t Greece.” But that’s not as encouraging as it sounds, he adds: “We are however, looking more and more like Japan. ... [Recent data] suggest that we may be heading for a Japan-style lost decade, trapped in a prolonged period of high unemployment and slow growth.”
This diagnosis of our economic disease has implications for the policy prescription, Krugman argues. “For the past few months, much commentary on the economy ... has had one central theme: policy makers are doing too much. Governments need to stop spending, we’re told. ... Meanwhile, there are continual warnings that inflation is just around the corner and that the Fed needs to pull back from its efforts to support the economy.”
Krugman will have none of this: “[T]the truth is that policy makers aren’t doing too much; they’re doing too little.” We should enact another stimulus plan, and administration officials would push for one if Congress had not been “spooked by the deficit hawks.” For its part, he adds, the Fed should abandon its groundless fears of inflation and work instead to ward off the threat of deflation—the true cause of Japan’s failure to regain economic vitality.
So is Japan really a better baseline for U.S. policymakers than Greece, and is it close enough to serve as a guide for policy? To be sure, there are some important resemblances. Like the U.S., Japan experienced a sharp run-up in equity and real estate, followed by a collapse. As in the U.S., this reverse weakened the banking system and coincided with a sharp contraction in commercial lending. Like their American counterparts, Japanese policymakers responded with substantial fiscal and monetary stimulus.
These are qualitative similarities. But there are quantitative differences, and they are large enough to warrant caution about direct policy inferences. Stocks in the U.S. are down about 40 percent from their all-time high, versus 75 percent for Japan. While U.S. real estate is down about 30 percent from its peak, Japanese land values are down more than 80 percent. In Tokyo, residential real estate has fallen by more than 90 percent, and commercial real estate in the heart of the financial district sells for 1 percent of its 1989 value. Brookings economist and former CEA director Barry Bosworth estimates that as a share of GDP, the destruction of wealth in Japan from peak to trough was about five times what it has been in the United States. Given the key role of stocks as well as real estate loans in the balance sheets of Japanese banks, it’s reasonable to assume that the Japanese banking system experienced a disruption far worse than ours.
It would stand to reason, then, that restoring Japan’s economy to health would require an even larger policy response than the one we’ve seen in the United States thus far. In some respects, that is what happened. Unfortunately, it hasn’t worked...
Read entire article at New Republic
As President Obama’s bipartisan fiscal commission gets set to convene, the Greek budget disaster has triggered the predictable flood of cautionary notes about how we’re spending too much and heading toward a debt crisis. Should these concerns illuminate the commission’s work—or are they merely alarmist?
Paul Krugman harbors no doubts: “Despite a chorus of voices claiming otherwise,” he writes, “we aren’t Greece.” But that’s not as encouraging as it sounds, he adds: “We are however, looking more and more like Japan. ... [Recent data] suggest that we may be heading for a Japan-style lost decade, trapped in a prolonged period of high unemployment and slow growth.”
This diagnosis of our economic disease has implications for the policy prescription, Krugman argues. “For the past few months, much commentary on the economy ... has had one central theme: policy makers are doing too much. Governments need to stop spending, we’re told. ... Meanwhile, there are continual warnings that inflation is just around the corner and that the Fed needs to pull back from its efforts to support the economy.”
Krugman will have none of this: “[T]the truth is that policy makers aren’t doing too much; they’re doing too little.” We should enact another stimulus plan, and administration officials would push for one if Congress had not been “spooked by the deficit hawks.” For its part, he adds, the Fed should abandon its groundless fears of inflation and work instead to ward off the threat of deflation—the true cause of Japan’s failure to regain economic vitality.
So is Japan really a better baseline for U.S. policymakers than Greece, and is it close enough to serve as a guide for policy? To be sure, there are some important resemblances. Like the U.S., Japan experienced a sharp run-up in equity and real estate, followed by a collapse. As in the U.S., this reverse weakened the banking system and coincided with a sharp contraction in commercial lending. Like their American counterparts, Japanese policymakers responded with substantial fiscal and monetary stimulus.
These are qualitative similarities. But there are quantitative differences, and they are large enough to warrant caution about direct policy inferences. Stocks in the U.S. are down about 40 percent from their all-time high, versus 75 percent for Japan. While U.S. real estate is down about 30 percent from its peak, Japanese land values are down more than 80 percent. In Tokyo, residential real estate has fallen by more than 90 percent, and commercial real estate in the heart of the financial district sells for 1 percent of its 1989 value. Brookings economist and former CEA director Barry Bosworth estimates that as a share of GDP, the destruction of wealth in Japan from peak to trough was about five times what it has been in the United States. Given the key role of stocks as well as real estate loans in the balance sheets of Japanese banks, it’s reasonable to assume that the Japanese banking system experienced a disruption far worse than ours.
It would stand to reason, then, that restoring Japan’s economy to health would require an even larger policy response than the one we’ve seen in the United States thus far. In some respects, that is what happened. Unfortunately, it hasn’t worked...