In reviewing commentary about all the posturing in Japan preparing for what looks like, to me, an end of the recovery idea, there was one very alarming passage that I think may be important (and not just widely ridiculous) that ties together failure and the possible future course:
Abe said yesterday he hadn’t decided whether to proceed with any snap election. He has said he’ll decide whether to raise the sales tax by the end of December. Nobel laureate in economics Paul Krugman last week met with the prime minister and urged him to postpone the increase, citing concern it could hurt the economy, according to Abe aide Etsuro Honda, who was present. [emphasis added]
This goes along with something I flagged a little while back in my own, at least, growing sense of a Keynes revival. What I said then seems to be sadly coming toward fruition:
That [the faltering global economy] seems to be a critique of all fiscal and monetary “stimulus” undertaken in the past seven years, and it is. But that setup is as my setup, mainly that the good doctor needed now, according to Peter Coy at Bloomberg, is Keynes. That would come as a major shock to almost everyone outside of the ideology as they might rightly ask whose theories have policymakers and authorities been following all this time?
We already know of at least one respect where Krugman (as a stand-in at least for the Keynesian perspective that is somehow still widely shared, especially in the orthodox economist class) has impacted “stimulus” activity, so his appearance in Japan is not at least unique (of course, he may have been consulting all along in various locations but only now is that being used as something of a positive factor). The timing of this is not surprising, especially in the context of the growing and widespread acceptance of “secular stagnation.”
In other words, Krugman’s primary critique has been to proclaim economic deficiency, which makes him look quite prescient. However, his basis for undercounting the “recovery narrative” is “austerity.” He has seen the lack of government spending in the past few years as the primary contribution to the weak growth environment. Now that the “weak growth environment” has become more widely accepted, not quite fully (yet) displacing the monetary-driven narrative, the danger is obvious.
So the appearance of Krugman and this new(ish) affinity for Keynes is not that authorities have been ignoring Keynes’ philosophies for seven years (which cannot be claimed) but that they have not done “enough” Keynes to this point – which is Krugman’s main point of emphasis and has been all along.
Within that framing the Bank of Japan should be doing even more QQE at the same time the Japanese government abandons any fiscal sense, scraps not just the future tax increase but likely the last while undertaking infrastructure “investments” (shovel ready, of course) on a biblical scale. In that sense, nobody probably should point out what Japan did in the 1990’s, as that probably wasn’t the “right” amount of Keynes either.
We have been living in the age of Keynesianism reborn from crisis (which his theory contributed mightily toward), but now we are being told that though it may have been some Keynes it was not enough Keynes. Apparently, like QQE purchases of Japanese government bonds, there is a magic and sadly secret formula which in the exact right formulation delivers enchanted economic properties. For some reason, like every monetary point, central banks and governments keep falling short in their mixtures as the answer to all our problems is always more and more of it.
As with a lot of changes taking place, there is a positive in that failure is not being ignored now as it had been uniformly in the past. Though certain “markets” don’t seem to be getting that message, that even the very practitioners of “stimulus” recognize if not its full failure then at least how far short it falls of intentions and expectations, it is a growing sense of nervousness groping for some answer. Unfortunately, the Krugman answer represents nothing more than the path of least resistance, as a way to maintain the status quo but still recognize reality.
I suppose if the distance between these bouts of actual awareness is long enough, we could sadly be in for interchangeable failures of different pieces of statist intervention. We started with Keynesian government “stimulus” that relented to purely monetary “stimulus” and now seem to be heading back toward government spending once more. Once that inevitably fails, “they” will probably resurrect “Friedman” to replace “Keynes”, this time with the “right amount” of monetarism (rereading Chapter 11 in A Monetary History probably). And so it will go back and forth with nary a reference to the actual economy until the entire globe is encompassed in fullblown Japanification for a quarter century or more (which would be a depressing and desolate future, especially as past history surrounding desperate economic times almost always ends in significant conflagration – political history is really economic history without all the math).
And “capitalism” will be blamed the entire time.