Why is it that the economic orthodoxy (including PK) disses fiscal policy &
favors monetary policy?
For example, in his analyses of Japan, PK ignores issues of how an economy
might be unresponsive to monetary policy, while exaggerating the
difficulties of fiscal policy. I'd say that the main technical problems
with fiscal policy involve (1) long lags in decision-making and (2) the
existence of a large outstanding government debt. The former seems totally
irrelevant to Japan (and recent tax cuts in the US suggest that fiscal
policy _can_ be done quickly) while the former seems unimportant compared
to the costs of continued stagnation. A third problem specific to Japan --
of over-building of public works projects -- could be overcome by switching
government spending to other types of spending, e.g., the nationalization
of the bad debts that Japanese banks hold (in return for financial reforms,
a la the US savings & loan bail-out). As I've noted, "tied" foreign aid
could also be used.
One reason why there's antagonism toward fiscal policy (versus monetary
policy) might be an antagonism toward democracy. After all, the Fed and the
Bank of Japan are not subject to very many democratic controls and is thus
run by a clique of technocrats who speak _our_ (professional economists')
language -- and care about _our_ intellectual fads -- rather than having to
care about what's good for the people, as elected officials do in an
attenuated way. Democracy has been subordinated to special interests, say
the anti-democrats, but then they ignore the way that the "independent"
central bank has been subordinated to the special interests of bankers and
the financial markets.
BTW, it seems to me that this basis for opposition to fiscal policy
(government deficits, etc.) is to a large extent illusory, since (given the
severe weakness of opposition forces) the government is just as much under
the business thumb as is the Fed.
Of course, a lot of economists are simply hung up with pre-Keynesian ideas
(as with the "microfoundations" movement of the new classicals and
supply-siders). In this view, we're _all_ supposed to balance our budgets,
including the government (though of course the private sector runs a large
deficit these days).
Many -- not PK, it seems -- simply think that recessions are minor events
or even beneficial. On the latter, mass lay-offs in Japan get rid of that
pesky primary labor market (which violates the neo-liberal principle that
markets should rule the world), so that only top corporate executives and
tenured professors will be insulated from market forces. Who cares if this
encourages the world recession to deepen, since we all know that in the
long run, Say's Law rules (if only because of the benevolence of the
technocrats at the Central Bank)?
Jim Devine [EMAIL PROTECTED] & http://bellarmine.lmu.edu/~jdevine
