>New York TIMES May 14, 2000 / RECKONINGS / By PAUL KRUGMAN / "Nihon
Keizai Shambles"<
In this column, PK re-applies his (mildly famous) analysis of the Japanese
stagnation. Again, he suggests that the Bank of Japan (BoJ) pump up the
Japanese money supply, in hopes of producing inflationary expectations and
thus negative expected real interest rates, which should (he thinks)
stimulate private-sector borrowing and spending and thus the Japanese economy.
Not being an expert on the Japanese economy, this sounds like it might
work. I wonder, though:
1) can the Bank of Japan easily increase the money supply? Isn't possible
that (at least initially) the banks will raise their excess reserves, while
the non-bank public raises its holdings of currency, all due to the fears
engendered by about 10 years of stagnation, along with the fragile
financial situation of Japan's industrial corporations, banks, and other
financial corporations (and the seemingly endless political stalemate)?
(We might also see a "liquidity trap" as financial speculators (fearful of
rising nominal interest rates) dump risky bonds and stocks and snap up the
extra cash to make their portfolios safer. This Keynesian trap is a
different liquidity trap than the one PK emphasizes. His is due to the fact
that nominal interest rates can't go below zero, since bankers don't want
to pay us to borrow. However, I don't see the Keynesian liquidity trap as a
very important phenomenon, except in the short run.)
2) If the expected real interest rates fall, will this stimulate spending?
will nonfinancial companies want to borrow if they already have a lot of
excess capacity, outstanding debts, and pessimistic expectations? (What
does the profit rate look like in Japan? A low profit rate discourages
corporate borrowing and provides the objective basis for pessimism.) isn't
it possible that the market for consumer durables is a mite saturated, so
that consumers don't want to borrow? don't cuts in interest rates in the US
work most strongly through the demand for housing? has there been
over-building in Japan that would discourage borrowing to finance
construction? isn't the market for owner-occupied housing pretty small in
Japan? How low must interest rates go to stimulate private spending enough?
3) If interest rates fall, it seems like it would mostly stimulate the
Japanese economy by driving down the value of the Yen. Is the BoJ willing
to accept such a fall? if it stimulates the economy, wouldn't it do so by
reducing imports from other countries (whose currencies aren't tied to the
Yen) and by increasing exports to those countries? isn't that a bit like a
flexible exchange-rate version of "beggar-thy-neighbor" policies? doesn't
it simply broadcast recession to the rest of the (non-Yen-hooked) world?
Wouldn't it be a good idea to stimulate the rest of the world (outside the
US of course), to pull Japan up? (The US is already pulling Japan up, so I
exclude it. Of course, this stimulus seems likely to end soon.)
It seems possible that if the BoJ followed PK's policy, it would strain and
strain and strain like Elvis on his last day (due to issues #1 and #2),
finally overcoming the obstacles and then _over-shooting_, raising the
money supply and thus aggregate demand _too much_. If the profit rate is
indeed low there, it seems like that would simply encourage an inflationary
non-recovery.
Let's get to PK's actual column:
>And that's why the falling Nikkei [stock market index] is such an ominous
omen. Mainly it reflects the "Nasdaq effect" -- the worldwide decline in
technology exuberance over the last two months. But whereas the United
States didn't need that exuberance -- in fact, the decline in tech stocks
has made the Fed's job easier, by turning down the flame under our
overheated economy -- Japan was counting on technology to save it from
stagnation. As good as Japanese technology may be -- and much of it is very
good indeed -- the prospect that technology will rescue Japan's economy is
now receding. Instead, the country is right back where it started: with an
economic malaise that shows no sign of going into spontaneous remission,
whose symptoms are mitigated only by deficit spending that cannot continue
at these levels. Meanwhile another year has gone by, and the mountain of
government debt has gotten 30 trillion yen or so higher. <
while these points are good, it is a basic economic mistake to not report
the government debt _relative to nominal GDP_ to give us some idea of its
relative size while correcting for inflation. PK is here slipping into the
sloppy scare-tactics of the US fiscal hawks. (At least he doesn't call it
the "national debt" or the "public debt"!) More importantly, to what extent
is the Japanese government's debt owed to foreigners and/or denominated in
foreign currency? If its not either of these, the debt could buoy the
economy the way that US World War 2 debt-accumulation did (by providing
people with safe assets). In any event, it's not the government debt that's
crucial, it's the private-sector debt, since the government of Japan is not
likely to go bankrupt during the present century (or even the next one,
which starts on Jan. 1, 2001). Unlike government debt, private-sector debt
can lead to waves of bankruptcy, as in the US at the start of its 1930s
Great Collapse.
>It's a sad story, which carries a moral for us all: technology is not a
magic elixir. The Internet, mobile phones and all that are exciting and
important, but those who count on them to solve all their problems are
likely to be disappointed.<
that's a good point, one that should be contemplated by those who emphasize
the supply side and forget demand.
Jim Devine [EMAIL PROTECTED] & http://liberalarts.lmu.edu/~JDevine
