Free Markets, Free People

Krugman: The “Nipponisation” of the World

After a lot of partisan “happy talk” about how the Obama administration is handling the economic crisis here, Paul Krugman goes on record saying the world is doomed to suffer Japan’s lost economic decade on a global scale.

The thing about Japan, as with all of these cases, is how much people claim to know what happened, without having any evidence. What we do know is that recessions normally end everywhere because the monetary authority cuts interest rates a lot, and that gets things moving. And what we know in Japan was that eventually they cut their interest rates to zero and that wasn’t enough. And, so far, although we made the cuts faster than they did and cut them all the way to zero, it isn’t enough. We’ve hit that lower bound the same as they did. Now, everything after that is more or less speculation.

For example, were the problems with the Japanese banks the core problem? There are some stories about credit rationing, but they are not overwhelming. Certainly, when we look at the Japanese recovery, there was not a great surge of business investment. There was primarily a surge of exports. But was fixing the banks central to export growth?

In their case, the problems had a lot to do with demography. That made them a natural capital exporter, from older savers, and also made it harder for them to have enough demand. They also had one hell of a bubble in the 1980s and the wreckage left behind by that bubble – in their case a highly leveraged corporate sector – was and is a drag on the economy.

The size of the shock to our systems is going to be much bigger than what happened to Japan in the 1990s. They never had a freefall in their economy – a period when GDP declined by 3%, 4%. It is by no means clear that the underlying differences in the structure of the situation are significant. What we do know is that the zero bound is real. We know that there are situations in which ordinary monetary policy loses all traction. And we know that we’re in one now.

Shorter Krugman, “we’re in new territory in terms of the size of the problem, but it is all eerily similar to what happened to Japan”. Unfortunately our reaction has been eerily similar to what Japan did as well.

Krugman’s bottom line:

WH: So, one way to think about it is that self-reinforcing financial crises rooted in overstretched, overborrowed companies and governments in less developed countries – like those in Argentina and Indonesia, which were amazingly destructive in the 1990s and 2000s, but localised – are now playing out in the developed world?

PK: There are really two stories. One is the Japan-type story where you run out of room to cut interest rates. And the other is the Indonesia- and Argentina-type story where everything falls apart because of balance-sheet problems.

WH: So in a nutshell your story is …

PK: The “Nipponisation” of the world economy with a bunch of “Argentinafications” playing a role in the acute crisis. But even after those are over, we have the Nipponisation of the world economy. And that’s really something.

And of course, implicit in the “Nipponisation” of the world economy is the “Nipponisation” of the US economy – something we’ve been talking about for some time. Now, add “cap and trade” and “health care reform” into the mix.

What will we be wishing we were suffering when that all kicks in, should it pass? Nipponisation, of course. As bad as lost decade or two might be, it would be heaven compared to the economic carnage those big tax and spend programs will inflict on a very weak economy here in the US. And that, of course, will ensure the “Nipponisation” of the world economy.


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6 Responses to Krugman: The “Nipponisation” of the World

  • So the key to riding out a recession is to cut interest rates as low as possible?  Gee, why haven’t we tried that? :/

  • The operating theory inside the Obama administration, in my opinion, is that the world productivity explosion itself can be leveraged to establish a new economic paradigm.

    The path to that is through a radical monetarism that would tie money supply not to productive output but to potential for consumption.

    Not only is this futurism in the worst sense of that term, it’s also being routed through some of the worst socialist protocols imaginable. The bottom line is that you can’t get there from here. And as you try to leverage off of the productivity explosion you simultaneously blind market nodes to price signals and the nodes lose the information needed to produce and trade.

  • Huh.  Can’t cut interest rates any lower, and we have balance sheet problems.

    I have a solution:

    * Let inefficient firms fail (no more bailouts), and cut as much fat from public payrolls as you can–that means the public sector gets pay cuts during a recession just like the private sector does.  Advocates of “fairness” should be outraged that one class of people gets to keep on commanding rising wages (taking money from the private sector, mind you!) while others are struggling to find work.

      You will now have a supply of cheap assets and even more surplus labor on the market.
      And you’ve cut government spending, which helps with your balance sheet problem.

    * Cut the cost of capital and labor by every means possible.

      Cut the payroll tax on the employer’s side.
      Remove or at least suspend as many regulations as possible that act as a wedge against employment and investment, where the harms of continued stagnation are worse than the thing the regulation is supposedly protecting against.  Unemployment is pretty hard on people.

    * Cut any subsidy or other trade barrier that raises the cost of goods.  Now is not the time to be propping up prices of goods, especially if you want to help unemployed and underemployed people and get businesses active again.

    * Stop promising more government spending, for pity’s sake.  You’re going to have balance sheet problems as long as you have a massive structural deficit and no plan for closing it.  In fact, start making ironclad commitments to balance the budget and maybe start paying down the debt, to kick in automatically as soon as economic growth picks back up.  In particular, promise to change the balance of taxes and spending in favor of investment and savings over consumption.

  • Well, let’s look back at another pronouncement of Kurgman, shall we?

    Says Krugman

    The basic point is that the recession of 2001 wasn’t a typical postwar slump, brought on when an inflation-fighting Fed raises interest rates and easily ended by a snapback in housing and consumer spending when the Fed brings rates back down again. This was a prewar-style recession, a morning after brought on by irrational exuberance. To fight this recession the Fed needs more than a snapback; it needs soaring household spending to offset moribund business investment. And to do that, as Paul McCulley of Pimco put it, Alan Greenspan needs to create a housing bubble to replace the Nasdaq bubble.

    Clearly, Krugman got what he wanted. Once again the problem was government meddling in the market, something he will never admit to, particularly when he’s trying to covince us what a great job the LightWorker is doing in meddling with the economy.