Collective Conscious

Matt Ste­in­glass:

The IMF takes up a few seri­ous papers from the 1990s that mar­shalled evi­dence that gov­ern­ment spend­ing cuts could raise growth and lower unem­ploy­ment, but they dis­miss them as irrel­e­vant to the cur­rent sit­u­a­tion. Those papers dealt with sit­u­a­tions in which large gov­ern­ment debt had dri­ven up inter­est rates, chok­ing off credit to busi­ness. This has lit­tle bear­ing on a world in which the Bank of Japan drops its inter­est rates to 0% as part of pledge to stim­u­late more infla­tion. Fis­cal retrench­ment in the 1990s cre­ated growth by low­er­ing inter­est rates, the IMF says; it can’t do that when inter­est rates are hit­ting the zero bound. It’s a famil­iar point that Paul Krug­man has been try­ing to make relent­lessly for almost two years now, but pol­i­tics have moved relent­lessly in the oppo­site direc­tion, and the pol­icy is con­strained by the pol­i­tics. As a result, Mr Krug­man is becom­ing resigned to dis­as­ter.

There’s a trap, and it’s the same thing that hap­pened with fis­cal stim­u­lus. You do some­thing in the right direc­tion that’s inad­e­quate, and then peo­ple say, well, that didn’t work, and instead of increas­ing the dosage and prov­ing it right, you give the thing up altogether.

All of this is very famil­iar if you stud­ied Japan in the ‘90s. In fact, we’re doing worse than the Japan­ese did. Our mon­e­tary pol­icy is a bit more aggres­sive, but our fis­cal pol­icy has been less aggres­sive. We have a larger out­put gap than they did, and we’ve had a surge in unem­ploy­ment that they never had, and our polit­i­cal will to act has been exhausted much faster than theirs was. On the cur­rent track, we’re going to look at Japan’s lost decade as a suc­cess story com­pared to us.

I don’t really have any­thing to add to that.

From the IMF: