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]

Tags: angela merkel, austerity economics, eu, euro, european union, japan, tpp, trans-pacific partnership

Occupying Japan and occupying Iraq

The collection of essays I quoted in the last post, The New American Empire: A 21st Century Teach-In on U.S. Foreign Policy (2005) Lloyd Gardner and Marilyn Young, eds., also includes one of the few discussions I've seen on how mistaken it was to make some casual equivalence of the task of occupying post-Second World War Japan with the occupation of Iraq that Cheney and Bush established in 2003. It's called "Occupation: A Warning from History" by John Dower.

Fortunately, this one is available online in two places. A Warning from History: Don’t expect democracy in Iraq Boston Review Feb/Mar 2003 contains the first four sections of the book version (with slight editing for the book version), and the final three parts appeared in both Dower on the Occupiers, 1931/2003 TomDispatch.com 06/20/2003 and The Other Japanese Occupation Mother Jones Online 04/27/2006. The quotations here are from the Boston Review and TomDispatch versions.

Dower cautions his readers that Americans have much to learn, not only from the postwar occupation but also from the Japanese Empire at war:

Although we speak of a military takeover of Japan in the 1930s, electoral politics and most functions of civil society continued through war into the postwar era. Tojo himself was eased from power, in proper parliamentary manner, in 1944. No one could stop the machine he and his fellow right-wing radicals had set in motion, however, until the war came home, culminating in Hiroshima and Nagasaki. Japan's was a short ride as empires go, but the devastation left in its wake was enormous.

Despite the deepening quagmire of occupation and empire, Japanese leaders and followers alike soldiered on - driven by patriotic ardor and a pitiful fatalism. It was only afterwards, in the wake of defeat, that pundits and politicians and ordinary people stepped back to ask: How could we have been so deceived?

We are in a better position to answer this now. (my emphasis)

When it comes to the occupation itself, one element present in the Japanese case not present with the US occupation of Iraq is that partly intangible but vital quality of legitimacy:

The postwar occupation of Japan possessed a great intangible quality that simply will not be present in the event of a U.S. war against Iraq. It enjoyed virtually unquestioned legitimacy — moral as well as legal - in the eyes of not merely the victors but all of Japan’s Asian neighbors and most Japanese themselves. Japan had been at war for almost fifteen years. It had declared war on the Allied powers in 1941. It had accepted the somewhat vague terms of surrender "unconditionally" less than four years later. Quite the opposite can be anticipated if the United States attacks and then occupies Iraq. The United States will find the legitimacy of its actions widely challenged—within Iraq, throughout the Middle East and much of the rest of the world, and even among many of its erstwhile supporters and allies.

The "idealists" of the New Deal also approached the occupation of Iraq in a far more pragmatic manner that the Cheney-Bush administration's holy warriors and free-market zealots:

What made the occupation of Japan a success was two years or so of genuine reformist idealism before U.S. policy became consumed by the Cold War, coupled with a real Japanese embrace of the opportunity to start over. There are moments in history - fleeting occasions of opportunity - when people actually sit down and ask, "What is a good society? How can we bring this about?" Winners in war do not ask this of themselves. Winners tend to say we won, we're good, we’re righteous, what we did was just, now it’s time to get back to business and build on our strengths. But losers - certainly in the case of Japan - are under more compulsion to ask what went wrong and what they might do to make sure they don’t fall into the same disasters again.

American policy toward defeated Japan meshed with this Japanese sense of failure and the necessity of starting over. The Americans may not have been self-critical, but they had definite ideas about what needed to be done to make Japan democratic. Much of this thinking came from liberals and leftists who had been associated with Franklin D. Roosevelt’s progressive New Deal policies - policies that were already falling out of favor in Washington before the war ended. One might say that the last great exercise of New Deal idealism was carried out by Americans in defeated Japan. It was this combination of the Americans using their "unconditional" authority to crack open the old authoritarian system and Japanese at all levels seizing this opportunity to make the reforms work that accounts for the success of the occupation. (my emphasis)

There certainly are things we can learn from history. Even things more specific than the destruction and horror of war and a sense of humility (or at least modesty) about American ability to impose our will on other nations.

But the careless application of bad historical analogies is leaving an incredible amount of unnecessary damage in its wake.

Tags: iraq war, japan, second world war