JUL 18, 2001
Other People's Money
By PAUL KRUGMAN
I t wasn't true when Richard Nixon said it, but it is true today: We
are all Keynesians now at least when we look at our own economy. We
give anti-Keynesian advice only to other countries.
When it comes to the U.S. economy, everyone including people who
imagine that they have rejected Keynesianism in favor of some doctrine
more congenial to the free-market faithful in practice views the
current slowdown in terms of the intellectual framework John Maynard
Keynes created 65 years ago. In particular, everyone thinks that
during a slump what we need is more spending.
Before Keynes, the general view was quite the opposite: economic
slumps were supposed to be the invisible hand's way of punishing
excesses, and the best cure was supposed to be a good dose of
austerity, public and private. Only as a result of the Keynesian
revolution did it become obvious to everyone so obvious that people
take it for granted that the problem during a slump is too little
spending, not too much, and that recovery depends on persuading the
public to start spending again.
So every time you read an article worrying that declining consumer
confidence may tip us into recession, or that interest rate cuts will
soon spark a recovery, or even that this time interest rate reductions
may not do the trick, you are reading Keynesian economics. Like the
man who was unaware that he had been writing prose all his life, these
writers may not know that they are Keynesians but they are.
And you would have to search far and wide to find anyone who thinks
that the U.S. government should slash spending and raise taxes to
offset the budget impact of this year's downturn, or who thinks that
the Fed is wrong to cut interest rates in the face of a slump. (There
are some people who think that the Fed has overdone it but they aren't
opposed to the policy in principle.)
But we by which I mean both policy makers in Washington and bankers in
New York often seem to prescribe for other countries the kind of
root-canal economics that we would never tolerate here in the U.S.A.
Yesterday former Senator Howard Baker, our new ambassador to Japan,
told reporters he did not expect to see that country drive down the
value of the yen. Aside from being inappropriate exchange rate policy
is a highly sensitive subject, about which even the secretary of the
Treasury needs to be highly circumspect this comment was part of a
pattern of hints from U.S. officials that we would not like to see
Japan weaken its currency. Since it is very difficult to imagine a
recovery strategy for Japan that does not involve at least the
possibility of a much weaker yen, this amounts to telling the Japanese
that they cannot do what we do routinely, that is, print however much
money it takes to get the economy moving again.
And then, of course, there's Argentina. What's shocking about the
political and economic crisis there is not so much its severity though
it is amazing to see the punishment now being inflicted on a country
that just three years ago was the toast of Wall Street as how
gratuitous it is. We're talking about a government whose debt really
isn't very large compared with the size of its national economy, and
whose fairly modest budget deficit is entirely the product of an
economic slump, forced into drastic spending cuts that will further
worsen that slump. It wouldn't be tolerated here but the bankers in
New York tell the Argentines that they have no alternative. And
Washington not the Bush administration, which has been eerily silent
as Argentina melts down, but the conservative think tanks that helped
the country bind itself in a monetary straitjacket agrees.
Does it have to be this way? Is Keynesianism good only for the U.S.
and selected other Western countries, but out of bounds for everyone
else? Maybe. But I suspect that the core of the problem is that small
countries, and even big countries like Japan that have lost their
self-confidence, are too easily bullied by men in suits who give them
advice dictated by a hard-line ideology they would never try to impose
back home.
My advice would be to stop listening to those men in suits, and do as
we do, not as we say.
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