Not too long ago, Paul Krugman had a piece in the New York Times, the purpose of which was to chide those benighted scare mongers who were busy pointing to the current financial meltdown in Greece as a warning against government profligacy, in essence claiming that they were simply paranoid and falling into a “fear of imaginary threats,” as he put it.
For the past few months, much commentary on the economy — some of it posing as reporting — has had one central theme: policy makers are doing too much. Governments need to stop spending, we’re told. Greece is held up as a cautionary tale, and every uptick in the interest rate on U.S. government bonds is treated as an indication that markets are turning on America over its deficits. Meanwhile, there are continual warnings that inflation is just around the corner, and that the Fed needs to pull back from its efforts to support the economy and get started on its “exit strategy,” tightening credit by selling off assets and raising interest rates.
The real comparison, according to the esteemed economist (he won the Nobel Prize, in case you hadn’t heard… not to appeal to authority, or anything), is Japan, which has endured a so-called “lost decade,” “trapped,” as it were, “in a prolonged era of high unemployment and slow growth.” Krugman’s prescription? Well, you may be surprised to learn that he supports more deficit spending:
So what we should really be asking right now isn’t whether we’re about to turn into Greece. We should, instead, be asking what we’re doing to avoid turning Japanese.* And the answer is, nothing.
It’s not that nobody understands the risk. I strongly suspect that some officials at the Fed see the Japan parallels all too clearly and wish they could do more to support the economy… I also suspect that Obama administration economists would very much like to see another stimulus plan. But they know that such a plan would have no chance of getting through a Congress that has been spooked by the deficit hawks. [emphasis added]
Strong stuff. And far be it from me to question Paul Krugman, of all people. He has a Nobel Prize (not sure if you heard about that or not), and his presentation at the annual meeting of the Association of American Geographers this year was packed beyond seating capacity, so there are obviously a lot of smart people who value his wisdom.
Japan is at “risk of collapse” under its huge debt mountain, the country’s new prime minister has said.
Naoto Kan, in his first major speech since taking over, said Japan needed a financial restructuring to avert a Greece-style crisis.
“Our country’s outstanding public debt is huge... our public finances have become the worst of any developed country,” he said.
After years of borrowing, Japan’s debt is twice its gross domestic product. [emphasis added]
If this blog had sound effects, you’d be hearing that overused “record needle scratching across vinyl noise” right now.
Maybe Japan just needs a new stimulus package. *Something-something “deficit hawk” something-something “imaginary threats”*
* I’m not sure if this is a veiled reference to The Vapors or not. I choose to believe that it is.