Nikita Kruschev is supposed to have said that after a nuclear war, the living will envy the dead. And after the financial equivalent of nuclear war, Paul Krugman thinks the survivors will envy Japan:
There's a trap, and it's the same thing that happened with fiscal stimulus. You do something in the right direction that's inadequate, and then people say, well, that didn't work, and instead of increasing the dosage and proving it right, you give the thing up altogether.
All of this is very familiar if you studied Japan in the '90s. In fact, we're doing worse than the Japanese did. Our monetary policy is a bit more aggressive, but our fiscal policy has been less aggressive. We have a larger output gap than they did, and we've had a surge in unemployment that they never had, and our political will to act has been exhausted much faster than theirs was. On the current track, we're going to look at Japan's lost decade as a success story compared to us. What we should be doing is a really big dose of stimulus on all of these fronts. Throw the kitchen sink at it. But if you ask me for ways to solve this problem that lives within the constraints of policymakers who don't want to be bold, I don't know that I have an answer for that.
I have several thoughts about this.
The first is that this political instinct is not all bad; the alternative is to nurture non-falsifiable beliefs in the effectiveness of our policies. After all, it's always possible that we simply didn't cut taxes enough to really trigger a supply side boom, or boost spending enough to realize whatever wonderful effects were waiting around the corner.
The second is that advocates of stimulus, or for that matter any policy, need to harbor some respect for the second best. I think Paul Krugman's greatest weakness as a columnist is that his main political strategy is to get really tough. If China's intervening to lower the value of its currency, the only reason that we're letting it happen is that the derisively named "serious people" are wimps who don't grasp the administration's moral obligation to threaten tariffs on Chinese goods
. If the health care bill isn't very good, it's because Obama didn't understand that all he had to do was channel Paul Krugman's steely will, and then keep kicking Republicans in the teeth until they lapped up his reform proposals and groveled for more. If the stimulus is too small, it's because the administration just wasn't trying hard enough.
I don't know any serious political analyst who thinks that a significantly larger stimulus bill was possible: not reporters, not politicians, not pollsters or staffers. Now, maybe there are a whole bunch out there that I haven't talked to . . . but they'd need to tell an awfully compelling story, because the fact was that the size of the stimulus bill was entirely dependent on what a handful of conservative Democrats and liberal Republicans in the Senate were willing to sign. We can rail about the inadequacy of our political institutions in some other blog post, but complain as we may, this remains a fact about the US political process.
It is, of course, possible that there was some way that Obama could have made the stimulus popular enough that Olympia Snowe, et al. would have gone along. But Paul Krugman hasn't really outlined anything more convincing than "Tell them it's a good idea, dammit!!!"
Given those political constraints, you need to accept that US policy is never going to be made by Paul Krugman, or perfectly enlightened politicians operating seamlessly within one of Krugman's models. I can't see how we were ever going to get even to the relatively modest figure (almost double) that Krugman wanted, much less a stimulus figure that would have pushed us closer to full employment
. The bond markets might have revolted, and the voters certainly would have. If stimulus depends on near-perfect execution to work, then it's a bad idea and we should abandon it.
On the question of whether we'll envy Japan, I think we just don't know. Tyler Cowen suggests some reasons
why things might be even worse than Krugman implies. On the other hand, one can argue that Japan's propensity for avoiding short-term pain meant they avoided a short, sharp crisis in exchange for a lengthy period of stagnation. And no, I don't mean that they should have pursued some sort of Mellonite "work the rot out" strategy, but their banks spent a long time not merely avoiding recognizing their huge losses, but actively throwing good money after bad--starving new firms of capital while they poured more loans into the bloated, failing incumbents that already owed more money than they could repay. This kept Japan's unemployment figure low, but also kept it from growing.
Japan's also in the middle of a staggering demographic transition, and since workforce growth is a substantial component of GDP growth, this has clearly played some role in the country's economic doldrums. How much, like everything else about Japan, is still in dispute. But these sorts of differences between us and Japan mean that you can't simply say that we're obviously worse off because our unemployment rate is higher.
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is a columnist at Bloomberg View
and a former senior editor at The Atlantic.
Her new book is The Up Side of Down