Later On

A blog written for those whose interests more or less match mine.

Japan shows the way

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Interesting Krugman column this morning on how Japan, which led the way into stagflation, now is showing the way out:

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.

This isn’t the maverick we were looking for. In Japan governments come and governments go, but nothing ever seems to change — indeed, Shinzo Abe, the new prime minister, has had the job before, and his party’s victory was widely seen as the return of the “dinosaurs” who misruled the country for decades. Furthermore, Japan, with its huge government debt and aging population, was supposed to have even less room for maneuver than other advanced countries.

But Mr. Abe returned to office pledging to end Japan’s long economic stagnation, and he has already taken steps orthodoxy says we mustn’t take. And the early indications are that it’s going pretty well.

Some background: Long before the 2008 financial crisis plunged America and Europe into a deep and prolonged economic slump, Japan held a dress rehearsal in the economics of stagnation. When a burst stock and real estate bubble pushed Japan into recession, the policy response was too little, too late and too inconsistent.

To be sure, there was a lot of spending on public works, but the government, worried about debt, always pulled back before a solid recovery could get established, and by the late 1990s persistent deflation was already entrenched. In the early 2000s the Bank of Japan, the counterpart of the Federal Reserve, tried to fight deflation by printing a lot of money. But it, too, pulled back at the first hint of improvement, and the deflation never went away.

That said, Japan never had the kind of employment and human disaster we’ve experienced since 2008. Indeed, our policy response has been so inadequate that I’ve suggested that American economists who used to be very harsh in their condemnations of Japanese policy, a group that includes Ben Bernanke and, well, me, visit Tokyo to apologize to the emperor. We have, after all, done even worse.

And there’s another lesson in Japan’s experience: . . .

Continue reading.

Written by LeisureGuy

14 January 2013 at 8:50 am

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