Krugman: Japan’s Economy, Crippled by Caution

[eridani]

http://readersupportednews.org/opinion2/277-75/32395-focus-respectability-is-killing-the-world-economy

What’s remarkable about this record of dubious achievement is that there actually is a surefire way to fight deflation: When you print money, don’t use it to buy assets; use it to buy stuff. That is, run budget deficits paid for with the printing press.

Deficit finance can be laundered, if you like, by issuing new debt while the central bank buys up old debt; in economic terms it makes no difference.

Why? Part of the answer is that demands for austerity serve a political agenda, with panic over the alleged risks of deficits providing an excuse for cuts in social spending. But the biggest reason it’s so hard to fight deflation, I contend, is the curse of conventionality.

After all, printing money to pay for stuff sounds irresponsible, because in normal times it is. And no matter how many times some of us try to explain that these are not normal times, that in a depressed, deflationary economy conventional fiscal prudence is dangerous folly, very few policy makers are willing to stick their necks out and break with convention.

The result is that seven years after the financial crisis, policy is still crippled by caution. Respectability is killing the world economy.

[DJ13]

1. The rich save, the poor spend

Try telling the billionaires we're giving money to the poor over them.........

[Art_from_Ark]

2. I don't think Krugman knows a whole lot about the Japanese economy

He is judging it by Western models, but Japan's domestic economy is unique. And Abe has been spending money like crazy, so Japan's economy is hardly "crippled by caution", unless you see it from the micro level.

[eridani]

3. Isn't the Japanese response to save more instead of spend? n/t

[Art_from_Ark]

7. That's on a micro level

The main drivers of the Japanese economy tend to be single employed women who are often still living with their parents. Married couples tend to spend a lot of money on themselves in the beginning, but when kids come along then the parents start to save for their kids. Empty nesters are often still paying off a 30-year mortgage and often wondering about how long they're going to continue working. Elderly people usually don't spend a lot on themselves because they remember bad economic times (although they will sometimes rebuild their home if they feel it has too much damage from earthquakes, etc.).

And Japanese houses are usually so small, it doesn't take much to fill them up. I'd love to have a reclining chair in my house, for example, but there's just no place to put it. Same goes for a real bed.

[Art_from_Ark]

8. Another thing

If a Japanese family has the equivalent of less than about $10,000 in savings, they tend to consider themselves "poor". Even $20,000 in savings doesn't provide much cushion. I myself have adapted this way of thinking.

[jeff47]

4. Yes, the economist who has been studying Japans economy since the early 90s

has utterly no idea how it works.

Abe's been trying to spend. He has been somewhat successful at doing so. He was recently forced to cut back, and the BOJ has spent the entire time undermining the effort.

To break Japan's liquidity trap (and any other country's), you have to credibly promise to be irresponsible. Otherwise, there's no reason to invest in anything. It's not exactly possible to make that promise when the other parts of the government say they will stop you.

[Art_from_Ark]

5. I don't think he specializes in the Japanese economy

I have been living it for decades. Krugman only seems to understand the surface, from a Western perspective, but he seems to have no idea how it actually works.

[jeff47]

11. Based on your superficial reading of a few newspaper columns. (nt)

[Art_from_Ark]

12. Can you tell me if Krugman has addressed the extremely important factor

of an exchange rate that had increased at one time by a factor of 5 (going from 360 yen/dollar in 1971 to 78 yen/dollar in 1994) and has fluctuated greatly since then (for example, from 72 yen/dollar in 2012 to 120 yen/dollar today)?

[jeff47]

13. Yes.

The guy literally wrote the book on Japan's economy between the 90s and 00s. He's written many papers on it.

He does more than write a newspaper column.

[Art_from_Ark]

14. I mean, specifically, the huge fluctuations in exchange rates that Japan has had to deal with.

He does touch upon it here:

"Obviously, there’s a lot going on here besides exchange rates. But there’s nothing in Japan’s experience to suggest that the exchange rate doesn’t matter."

http://krugman.blogs.nytimes.com/2010/09/22/about-the-yen/?_r=0

But that's a pretty lame conclusion, actually, because exchange rates have had a LOT to do with the health of Japanese companies.

For example, if a Japanese company signed a contact in US dollars at 120 yen/dollar, and the break-even threshold was 105 yen/dollar, the company would start losing money if the yen became stronger than that (that is, the dollar was worth less than 105 yen). And a stronger yen would make it more difficult for Japanese companies to be competative in future international contracts, even if the Japanese yen price remained the same. I have seen this cripple a few Japanese companies over the years.

[jeff47]

15. Yes, specifically.

Again, he writes more than what you see at the NYT.

[Art_from_Ark]

16. Even so, why did he make such a lame conclusion about the exchange rate effect

in the New York Times article, if he actually thinks that it was much more influential? I will go so far as to say that in that article I linked, he admitted that the exchange rate fluctuations did have some effect, but he tried to downplay it. However, it has been a tremendous factor affecting Japan's economy.

[Jim Lane]

9. What he actually wrote is more nuanced

Krugman described Abe's program as "bold — but not bold enough". He added, "Mr. Abe has been less conventional than most, but even he set his program back with an ill-advised tax increase."

As for Japan's economy being unique, Krugman's column addresses that, too (as best can be done in the space of one column).

I see no reason to assume that Krugman is judging Japan by Western models. He's been studying Japan since the 1990s. Even this limited bibliography, which seems to cover only 1998 and 1999, shows his close attention to the subject. For more information, see his Wikipedia bio, where the word "Japan" occurs 21 times.

[Art_from_Ark]

10. I agree that the tax increase was ill-advised

It basically added 3% to the cost of most purchases.

However, what I have read about Krugman's writings on Japan don't seem to address a lot of things like the tremendous impact that wildly fluctuating exchange rates have had on Japan's economy (Japan has had to deal with an exchange rate that has been as low as 360 yen per dollar up to 1971, to as high as 72 yen per dollar just a few years ago), especially since the Plaza Accord of 1985. Japan's period of high growth ended decades ago. It now has a very mature economy that is really hard to stimulate.

[DLnyc]

6. Sounds great! Now if only we had a candidate who was proposing a trillion dollar infrastructure

program!

Not counting that crazy socialist from Vermont, of course.

I think Krugman is absolutely right, what is needed across the globe is to pump money into actual work, rebuilding infrastructure, building non-carbon energy systems and transportation systems, paying actual labor to build things we actually need.

Instead we are pouring trillions of dollars into the pockets of the ultra-rich in the form of high-end tax-cuts and fiscal programs that just prop up banks and hedge funds.

[Demeter]

17. Japan is Crippled by Corruption

Hard to believe that there's a nation at peace more corrupt than the USA, but there it is.