For three years economic policy throughout the advanced world has been paralyzed, despite high unemployment, by a dismal orthodoxy. Every suggestion of action to create jobs has been shot down with warnings of dire consequences. If we spend more, the Very Serious People say, the bond markets will punish us. If we print more money, inflation will soar. Nothing should be done because nothing can be done, except ever harsher austerity, which will someday, somehow, be rewarded.
But now it seems that one major nation is breaking ranks — and that nation is, of all places, Japan.
Even though Japan's massive Keynesian spending plan in the 1990s did not prevent the "lost decade," nonetheless it seems that the Japanese are ready for their own version of Phase II. (True to form, Krugman claims that Japan's trouble was that it did not build enough roads and bridges to nowhere to have a sustained recovery.)
I'll let Krugman go on with his newest version of the magic of inflation, but I would like to share a great article on the Japanese experience, written by Doug French. Japan, says French, engaged in massive amounts of malinvestment during the 1980s, but the government did everything it could to keep the necessary liquidations from happening:
Between 1992 and 1995, the Japanese government tried six stimulus plans totaling 65.5 trillion yen and they even cut tax rates in 1994. They tried cutting taxes again in 1998, but government spending was never cut. Also in 1998, another stimulus package of 16.7 trillion yen was rolled out nearly half of which was for public-works projects. Later in the same year, another stimulus package was announced, totaling 23.9 trillion yen. The very next year an ¥18 trillion stimulus was tried, and, in October of 2000, another stimulus for 11 trillion was announced. As economist Ben Powell points out, "Overall during the 1990s, Japan tried 10 fiscal stimulus packages totaling more than 100 trillion yen, and each failed to cure the recession," with Japan's nominal GDP growth rate below zero for most of the five years after 1997.That, folks, means a lot of bridges to nowhere. Unfortunately for Japan, when this latest experiment with inflation and new government spending provides results similar to what happened before, Krugman will claim that the problems was a lack of spending and inflation. I doubt seriously that the Inflation Fairy will grant Japan or Krugman their wishes: a booming economy.