Re: Other People's Money
>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. If Greenspan were a Keynesian, why did he raise rates last year with hardly any inflation and stable unit labor costs? He acted as if he wanted to bring on an economic slump. And so he did. So maybe the view of recessions as douches is not discredited even in the US. > >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. It is not obvious to me that Japan's massive fiscal stimulus has worked as Keynesian theory would predict. If Krugman wants everyone to be a Keynesian, he has to explain (away) its failures--the failure of Keynesian fiscal policy to have much impact in Japan, the devolution of Keynesian policy into runaway inflation in the 70s. > >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. Yes but with the world economy teetering on the precipice, why are not Krugman and deLong militating for big new debt-financed government expenditures? It seems to me that Keynesianism may not be dead, but it's been cut down to size in the US as is so evident in Krugman's and deLong's technocratic over-reliance on monetary policy. > 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. Or maybe Krugman does not know what a real Keynesian is (Eisner, Davidson). > >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.) And you would have to search even farther and wider to find someone who believes that the govt should not give money back in tax rebates but spend it (bigger Samuelsonian multiplier if govt spends than from a tax rebate) and then spend more through debt financed expenditures. It seems to me that Keynesianism as a solution to global deflation is in fact dead, and that is evident in the limited "Keynesian" policies which technocrats like Krugman and deLong advocate. Krugman and deLong arguably represent the death of Keynesianism. > >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. We tolerated our independent central bank thrusting us into recession this year. > >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. Krugman gives no attention to the competitive devaluations which a depreciating yen could engender. > 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 routine
Other People's Money
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. Copyright 2001 The New York Times Company | Privacy Information [pixel.gif]
