Wednesday, December 04, 2013

The austerity plague

Paul Krugman gets shrill on the austerians again in his blog post, PREs, VSPs, and the ECB 12/04/2013. I don't recall seeing "PRE" before; it may be a Krugman invention. It evidently stands for Perfectly Reasonable Economist. He's discussing a speech by European Central Bank chief economist Peter Praet, which offers a reasonable diagnosis of European policy but pulls back from its implications for policy recommendations:

As a result, his underlying framework for thinking about European problems seems essentially indistinguishable from mine; as ECB watchers says, it’s a framework that sees a useful role for moderate inflation, both to avoid the zero lower bound and to ease the path of internal devaluation. And you do have to wonder what calculation leads to the notion that a target of "close to but less than 2%" is appropriate, as opposed to, say, 3 or 4 percent.

But actually you don’t have to wonder. Whatever Praet may privately think, he and his boss have to deal with Europe’s Very Serious People — people who believe in austerity regardless of circumstances, and who also say things like this, from the Bundesbank’s Jens Weidmann, declaring that “the money printer is definitely not the way to solve [Europe's problems]“. This is stated as if it is a self-evident truth — even though any PRE can easily make the case (as Praet does) that the money printer is, in fact, something that can offer a great deal of help in solving Europe’s problems.

The sad and remarkable thing that we've learned over the past year or so is how little intellectual debate matters. On both fiscal austerity and monetary policy, the PREs have completely blow the VSPs out of the water — the inflationistas, the expansionary austerians, the 90-percent threshold of doom people have all seen their claims collapse in the face of evidence. Yet policy barely changes, and the VSPs continue to talk as if they are in possession of The Truth.
Anatole Kaletsky worries that Japan may be turning away from a promising course of economic stimulation (Japan's economy risks backsliding New Straits Times 12/01/2013). The news from the expansionary policy pursued by the conservative government of Shinzo Abe has been pretty good:

Japan is the world's third-biggest economy, with national output roughly equal to France, Italy, Spain, Portugal and Greece combined. This year, Japan has become, very unusually, a leader in terms of financial prosperity and economic growth.

According to the latest International Monetary Fund (IMF) forecasts, Japan's two per cent growth rate this year will be the fastest among the G7 developed countries, easily outpacing the next strongest economies, Canada and the US, each with 1.6 per cent growth.

Japan's stock market has gained 70 per cent since last December, far exceeding the 25 per cent bull market on Wall Street, and Japan's corporate profits are projected to increase by 17 per cent, according to Consensus Economics, compared with paltry gains of three to four per cent in Germany and US.
It certainly sounds better than the death-grip of Angie-nomics in the eurozone!

But not all is well. Abe's government seems to be turning in the Angela Merkel direction on fiscal policy:

The reasons for pessimism follow directly from the main driving forces of Japan's new economic programme, the so-called "three arrows" of Abenomics -- fiscal stimulus, monetary expansion and structural reform.
The second of these arrows -- monetary expansion -- is flying as fast as ever. But the first, fiscal, arrow is about to turn into a boomerang that could kill Japan's economic recovery stone dead.

In April, an increase in consumption tax from five to eight per cent, along with some cutbacks in public spending, will produce a narrowing of the structural budget deficit worth 2.5 per cent of gross domestic product, according to IMF.

This massive fiscal tightening, which happens to be exactly equivalent to the US fiscal tightening this year, to Italy's last year and to Britain's in 2011, is a very big risk to take with the Japanese economy's still-tentative recovery.
What Kaletsky calls "structural reforms" for Japan seems to mean pretty much what it always does in the neoliberal vocabulary: weakening workers' security and lowering their incomes. But what Kaletsky sees as bad news in that regard seems like good news to me:

Finally, the third arrow of Abenomics, structural reform, has turned out to be more like a straw. Most of the reform programmes that were eagerly anticipated after July's Upper House election have been quietly forgotten.

Labour market and wage liberalisation, tax restructuring, nuclear power restoration, changes in corporate governance, service industry deregulation and pension fund asset re-allocation have either been abandoned or repeatedly postponed.

Admittedly, some trade reforms are under active consideration because of the Trans-Pacific Partnership talks with the US. But these changes will mainly involve agriculture and are unlikely to stimulate economic activity significantly in the next year or two. [my emphasis]
Our old "friend," the Trans-Pacific Partnership (TPP), another neoliberal dark cloud on the Japanese and US horizon.

I have very little faith in monetarist solutions to stimulate economic growth, though usurious interest rates can certainly impede economic activity. Kaletsky is more qualified in his caution about that, stressing as Krugman has been doing in this context the particular conditions of interest rates at the zero lower bound:

The recent experiences of the US, Britain and Europe all suggest that monetary expansion tends to be less powerful than fiscal tightening when interest rates are near zero and, therefore, cannot be reduced any further. In these conditions, monetary policy can only work indirectly by boosting asset prices and creating wealth effects. And the scope for quantitative easing to boost bond prices is even more limited in Japan than it has been in the US and Britain. [my emphasis]
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