However, even a cursory reading of the history demonstrates Hoover openly rejected Mellon's advice and tried stimulus after stimulus, only to see the economy crumble. (Krugman's response always is the same: Hoover tried "too little, too late." So, whenever ANY so-called stimulus does not work, the standard Krugman-Keynesian response is that the "stimulus" was "too small.")
Thus, he takes issue with a paper by Alberto F. Alesina and Silvia Ardagna in which the authors claim that tax cuts, as opposed to increases in government spending, provide a better "stimulus" for a moribund economy. Not having read the paper, I cannot make any "expert" or otherwise comments except to say that the issue at hand ultimately is not "stimulus" at all; it is the presence of malinvestments that must be liquidated in order for the economy to recover.
Once a boom has collapsed, the boom-era malinvestments begin to act like cancer cells, sucking the life out of what is left of the economy. It is better to let the market salvage any malinvested assets that it can while permitting the others to liquidate rather than to have these sick "assets" bring down the entire economy. (Government Motors and Chrysler, anyone?)
Krugman, however, goes on to criticize the paper on two points: (1) the presence of a "liquidity trap" in which monetary expansion by the central bank no longer can "stimulate" anything, and (2) the record of so-called expansionary policy of the Japanese government during Japan's decade-long recession of the 1990s. Let me begin with the "liquidity trap" arguments.
Murray Rothbard in his classic America's Great Depression devastates the Keynesian "liquidity trap" in the following passage:
...the Keynesians are here misled by their superficial treatment of the interest rate as simply the price of loan contracts. The crucial interest rate, as we have indicated, is the natural rate—the "profit spread" on the market. Since loans are simply a form of investment, the rate on loans is but a pale reflection of the natural rate. What, then, does an expectation of rising interest rates really mean? It means that people expect increases in the rate of net return on the market, via wages and other producers' goods prices falling faster than do consumer goods' prices. But this needs no labyrinthine explanation; investors expect falling wages and other factor prices, and they are therefore holding off investing in factors until the fall occurs. But this is old-fashioned "classical" speculation on price changes. This expectation, far from being an upsetting element, actually speeds up the adjustment. Just as all speculation speeds up adjustment to the proper levels, so this expectation hastens the fall in wages and other factor prices, hastening the recovery, and permitting normal prosperity to return that much faster. Far from "speculative" hoarding being a bogy of depression, therefore, it is actually a welcome stimulant to more rapid recovery.
Keep in mind that Keynesians hold that "real rates" don't mean much, just as Keynes advocated inflation to cut real wages as a means to increase employment. His response was to declare that workers are only interested "in their money wage." History tells us something different, does it not?
On the Japanese recession, Krugman differs with Alesina and Ardagna on the timing and the forcefulness of the government's "stimulus" actions, yet his response is more technical than it should be:
First, the whole stimulus debate is supposed to be about what happens when interest rates are up against the zero bound. Everything is different if the central bank is busy adjusting rates in response to conditions, and may well raise rates to offset the effects of any fiscal expansion. Yet the Alesina-Ardagna analysis doesn’t make that distinction; Japan in the 90s, which was up against the zero bound, is treated the same as a batch of countries in the 70s and 80s, when interest rates were quite high.
Second, they use a statistical method to identify fiscal expansions — trying to identify large changes in the structural balance. But how well does that technique work? When I want to think about Japan, I go to the work of Adam Posen, who tells me that Japan’s only really serious stimulus plan came in 1995. So I turn to the appendix table in Alesina/Ardagna, and find that 1995 isn’t there — whereas 2005 and 2007, which I’ve never heard of as stimulus years, are.
However, as Doug French recently wrote, the Japanese government enacted a number of spending and interest-rate cutting actions during the 1990s, none of which worked. (True to form, Krugman several years ago claimed that had Japan's government not engaged in such actions, the Japanese economy would have fallen into depression, another "Heads, I win, Tails, you lose" proposition we often see from Krugman.)
Interestingly, Krugman always has approached the Japanese recession as having come out of nowhere, or he has linked it to Japan's high savings rate. French, however, notes that Japan had a huge and unsustainable boom that turned into a combination of stock and real estate bubble which popped:
For a brief moment in 1990, the Japanese stock market was bigger than the US market. The Nikkei-225 reached a peak of 38,916 in December of 1989 with a price-earnings ratio of around 80 times. At the bubble's height, the capitalized value of the Tokyo Stock Exchange stood at 42 percent of the entire world's stock-market value and Japanese real estate accounted for half the value of all land on earth, while only representing less than 3 percent of the total area. In 1989 all of Japan's real estate was valued at US$24 trillion which was four times the value of all real estate in the United States, despite Japan having just half the population and 60 percent of US GDP.
Bubbles, as we have seen, result from deliberate "expansionary" policies by government authorities, yet Krugman always seems to treat them as being solely the product of private enterprise. It never occurs to him that the policies of high leverage and betting on inflated asset values would not happen systematically if government were not acting behind the scenes. Instead, he tells us that the only thing that can rescue a financial system is a new round of government regulations.
Japan did not go into recession because of laissez-faire or because its citizens saved too much money, just as the Chinese did not cause our financial bubbles with their own savings. Krugman's response to the boom and bust cycle reminds me of something I saw written about a friend of mine: "The trouble with the world is wine, women, and song. We must stop singing."
Post a Comment