For some reason, yesterday’s column drew more positive email than the last 10 combined. This one, from a fellow Mensan, was pretty par for the course:
You make more sense in a few paragraphs than all of the establishment wizards…. You should be teaching Economics!
I rather doubt that; I don’t have the patience for those who don’t grasp things the first time that a good teacher requires. Anyhow, speaking of the establishment wizards, I was perusing one of Paul Krugman’s books in order to dig up what I remembered was a very untimely prognostication favoring newfangled equity investments over the barbarous relic. I didn’t find it there, as it turns out the advice was given in a different publication, but I did find something even more useful; the policy prescription that is very likely to succeed fiscal stimulus once it becomes apparent that the stimulus attempts have failed.
The standard response to recession is to cut interest rates…. Japan was a bit slow about cutting interest rates after the bubble burst, but it eventually cut them all the way to zero, and it still wasn’t enough. Now what? The calssic answer, the one that has been associated with the name of John Maynard Keynes, is that if the private sector won’t spend enough to maintain full employment, the public sector must take up the slack….
And in fact Japan tried. Since the early 1990s the government has produced a series of stimulus packages, borrowing money to build roads and bridges whether the country needed them or not. These packages created jobs directly; they also clearly did provide the economy with some boost every time they were tried. The trouble was that the programs didn’t seem to get enough bang for the yen…. In short, the attempt to jump-start the economy with deficit spending has reached its limits. So now what?…
The answer is that an economy which is in a liquidity trap needs expected inflation – that is, it needs to convince people that the yen they are tempted to hoard will buy less a month or a year from now than they do today.
– The Return of Depression Economics, pp 78-79
Krugman talks openly about how those who support this idea of “quantitative easing” are biding their time and waiting for when further bad news finally makes “the time ripe for radical action”. What he’s really talking about here is the introduction of negative interest rates, of money with an expiration date. I think this may partly explain why the hyperinflation/deflation debate is so difficult to settle, because the switch from monetary policy to fiscal policy has largely taken inflation off the table for the time being while the stimulus programs are enacted. Only once they fail will the economic leeches return to trying to treat the patient by further bleeding him.
There will almost surely be at least three rounds of stimulus attempted before the neokeyns finally despair of fiscal policy, which means that quantitative easing/negative interest that Krugman is prescribing here probably won’t be seriously discussed until mid-2010 and won’t be enacted any sooner than late 2011.