On 22 Nov 2014
And The Person Responsible For Japan's Economic Endgame Is... Paul Krugman,
There are two words that should strike fear in the hearts of any rational-thinking citizen of the world - Paul Krugman. Wondering why? As Alhambra's Jeff Snider notes, we already know of at least one respect where Krugman (as a stand-in at least for the Keynesian perspective that is somehow still widely shared, especially in the orthodox economist class) has impacted 'stimulus' activity, Sweden. And now his appearance in Japan enabled what Japanese economists call a "historic meeting," as Bloomberg reports that Abe met with the Nobel-prize winner for 40 minutes who "helped the prime minister make up his mind," that delaying the fiscally-responsible tax-hikes was the right thing to do (and increasing QQE) or Japan "wouldn’t escape deflation." Mission Accomplished... and if it fails, moar will be needed and 'capitalism' will be blamed.
As Bloomberg reports, with a December deadline approaching, Prime Minister Shinzo Abe was considering whether to go ahead with a 2015 boost to the consumption levy. Evidence was mounting that the world’s third-largest economy was struggling to shake off the blow from raising the rate in April, which had triggered Japan’s deepest quarterly contraction since the global credit crisis...
When Japanese economist Etsuro Honda heard that Paul Krugman was planning a visit to Tokyo, he saw an opportunity to seize the advantage in Japan’s sales-tax debate.
Honda, 59, an academic who’s known Abe, 60, for three decades and serves as an economic adviser to the prime minister, had opposed the April move and was telling him to delay the next one. Enter Krugman, the Nobel laureate who had been writing columns on why a postponement was needed.
Honda succeeded in organizing a 20-minute meeting between the prime minister and the U.S. economist. It went about double the allotted time.
“That nailed Abe’s decision -- Krugman was Krugman, he was so powerful,” Honda said in an interview yesterday in the prime minister’s residence, where he has an office. “I call it a historic meeting.”
Krugman plays down his role, saying the Nov. 6 meeting with Abe “was very straightforward.”
“He had questions and I hope I answered them clearly,” Krugman said in a telephone interview yesterday. “I told him the kinds of things I’ve been writing -- I hope I made a good case. What effect it had on him is unknown to me. He’s certainly not going to blurt out ‘I’m sold.’”
Following Abe’s Nov. 18 decision to postpone next year’s tax increase by 18 months, Krugman said: “I’m happy to see what they’re doing.”
Hamada, who had advised Abe on his pick for Bank of Japan governor, said that “Abe listened to Krugman’s view very carefully.” Hamada said in an interview Nov. 18 that “he probably helped the prime minister make up his mind.”
“He said we should be cautious this time in raising the sales tax and if we weren’t it would break the back of the economy,” Abe said. “He said if that happened, we wouldn’t escape deflation, it would be uncertain whether we could revive the economy and repair the nation’s finances. I think that’s the case.”
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However, Alhambra's Jeffrey Snider has strong opinions on just where this leads...
In reviewing commentary about all the posturing in Japan preparing for what looks like, to me, an end of the recovery idea, there was one very alarming passage that I think may be important (and not just widely ridiculous) that ties together failure and the possible future course:
Abe said yesterday he hadn’t decided whether to proceed with any snap election. He has said he’ll decide whether to raise the sales tax by the end of December. Nobel laureate in economics Paul Krugman last week met with the prime minister and urged him to postpone the increase, citing concern it could hurt the economy, according to Abe aide Etsuro Honda, who was present. [emphasis added]
This goes along with something I flagged a little while back in my own, at least, growing sense of a Keynes revival. What I said then seems to be sadly coming toward fruition:
That [the faltering global economy] seems to be a critique of all fiscal and monetary “stimulus” undertaken in the past seven years, and it is. But that setup is as my setup, mainly that the good doctor needed now, according to Peter Coy at Bloomberg, is Keynes. That would come as a major shock to almost everyone outside of the ideology as they might rightly ask whose theories have policymakers and authorities been following all this time?
We already know of at least one respect where Krugman (as a stand-in at least for the Keynesian perspective that is somehow still widely shared, especially in the orthodox economist class) has impacted “stimulus” activity, so his appearance in Japan is not at least unique (of course, he may have been consulting all along in various locations but only now is that being used as something of a positive factor). The timing of this is not surprising, especially in the context of the growing and widespread acceptance of “secular stagnation.”
In other words, Krugman’s primary critique has been to proclaim economic deficiency, which makes him look quite prescient. However, his basis for undercounting the “recovery narrative” is “austerity.” He has seen the lack of government spending in the past few years as the primary contribution to the weak growth environment. Now that the “weak growth environment” has become more widely accepted, not quite fully (yet) displacing the monetary-driven narrative, the danger is obvious.
So the appearance of Krugman and this new(ish) affinity for Keynes is not that authorities have been ignoring Keynes’ philosophies for seven years (which cannot be claimed) but that they have not done “enough” Keynes to this point – which is Krugman’s main point of emphasis and has been all along.
Within that framing the Bank of Japan should be doing even more QQE at the same time the Japanese government abandons any fiscal sense, scraps not just the future tax increase but likely the last while undertaking infrastructure “investments” (shovel ready, of course) on a biblical scale. In that sense, nobody probably should point out what Japan did in the 1990’s, as that probably wasn’t the “right” amount of Keynes either.
We have been living in the age of Keynesianism reborn from crisis (which his theory contributed mightily toward), but now we are being told that though it may have been some Keynes it was not enough Keynes. Apparently, like QQE purchases of Japanese government bonds, there is a magic and sadly secret formula which in the exact right formulation delivers enchanted economic properties. For some reason, like every monetary point, central banks and governments keep falling short in their mixtures as the answer to all our problems is always more and more of it.
As with a lot of changes taking place, there is a positive in that failure is not being ignored now as it had been uniformly in the past. Though certain “markets” don’t seem to be getting that message, that even the very practitioners of “stimulus” recognize if not its full failure then at least how far short it falls of intentions and expectations, it is a growing sense of nervousness groping for some answer. Unfortunately, the Krugman answer represents nothing more than the path of least resistance, as a way to maintain the status quo but still recognize reality.
I suppose if the distance between these bouts of actual awareness is long enough, we could sadly be in for interchangeable failures of different pieces of statist intervention. We started with Keynesian government “stimulus” that relented to purely monetary “stimulus” and now seem to be heading back toward government spending once more. Once that inevitably fails, “they” will probably resurrect “Friedman” to replace “Keynes”, this time with the “right amount” of monetarism (rereading Chapter 11 in A Monetary History probably). And so it will go back and forth with nary a reference to the actual economy until the entire globe is encompassed in fullblown Japanification for a quarter century or more (which would be a depressing and desolate future, especially as past history surrounding desperate economic times almost always ends in significant conflagration – political history is really economic history without all the math).
And “capitalism” will be blamed the entire time.