Consider this list of possible actions from Paul Krugman -- citing Chairman Bernanke:
Back then, Mr. Bernanke suggested that the Bank of Japan could get Japan’s economy moving with a variety of unconventional policies. These could include: purchases of long-term government debt (to push interest rates, and hence private borrowing costs, down); an announcement that short-term interest rates would stay near zero for an extended period, to further reduce long-term rates; an announcement that the bank was seeking moderate inflation, “setting a target in the 3-4% range for inflation, to be maintained for a number of years,” which would encourage borrowing and discourage people from hoarding cash; and “an attempt to achieve substantial depreciation of the yen,” that is, to reduce the yen’s value in terms of other currencies.Let's take these in order presented:
1.) purchases of long-term government debt (to push interest rates, and hence private borrowing costs, down): The Fed has already done this, and I believe it did help to keep rates down. But right now, the market is already pricing the 10 year at 2.12%. Realistically, how much lower to rates have to go before people start borrowing? In short, I think that Ben thinks the market is already engaging in QEIII with no prodding from the Fed.
2.) "an announcement that short-term interest rates would stay near zero for an extended period:" Done -- in the last Fed statement.
3.) "an announcement that the bank was seeking moderate inflation, “setting a target in the 3-4% range for inflation, to be maintained for a number of years:" while the Fed hasn't done this explicitly, it is implicit in their statement that rates would stay low for several years.
4.) "an attempt to achieve substantial depreciation of the yen:" The dollar is already very cheap -- as evidenced by the importance of exports in the latest expansion. And -- we need trading partners to see enough growth to purchase our exports. Considering the Indian and Brazilian yield curves have completely or partially inverted recently, this might not be happening.
In short, by Ben's own statements, he's already done a lot -- more or less everything he can do.
That means all that's really left is fiscal policy. And given the current tenor in Washington, that's not going to happen.
9 comments:
Keynes so-called theory cannot be considered a scientific theory since it does not stipulate under which circumstances it gets falsified.
Japan spent a lot but Krugman will always say it was too little.
If stimulus fails, just say it was not big enough.
On the other hand, no other business cycle theory I have seen states what must not happen for the theory to live on.
That's why (or because) economics is more politics than science.
Johan
Johan, your bias against Keynesian economics shows when you write, "Japan spent a lot but Krugman will always say it was too little." No, he will NOT alway say it was too little.
In America's current liquidity trap, Krugman was able to (and did before the fact) give a value for a stimulus plan that he thought would have been appropriately sized to restore the economy to health via fiscal policy only. I think that value was ~$2.1T, as opposed to the ~$0.8T that was actually passed.
Krugman was also very explicit that the nature of the stimulus plan was important, too. He called for direct infrastructure investment spending, direct government hiring of the unemployed, and direct mortgage assistance to owners, among other things. Instead, about half of that $0.8T was tax cuts for the Rich that stimulated virtually nothing but the bond, equity, and commodities markets as the Rich saved that money for themselves rather than investing it in businesses that would produce more jobs for the under/un-employed.
Economics is a social science in which some direct experimentation is either impossible or inappropriate. That is the nature of social sciences. It is, however, entirely falsifiable. Krugman's favorite macroeconomic model is the Keynes-Hicks model. It makes plenty of predictions, any one of which could be falsified by the facts. It need not be purely scientific, nor omniprescient, to be a valid social science theory. It's limitations should be (and often are) noted whenever it makes predictions that are based on limited experimentation and more on qualititative analysis. And just to be clear, "qualitative analysis" does NOT equal simple guesswork. It can be quite rigorous, even if all variables cannot be perfectly controlled in double-blinded experiments.
True economics is NOT politics, no matter what some political thinkers/talkers would have you believe.
Wow, Jimdotz just said just about everything that could be said on the issue, well done
"Keynes so-called theory cannot be considered a scientific theory since it does not stipulate under which circumstances it gets falsified."
You just described essentially every theory pertaining to both economics and the social sciences in general. Good job.
The dollar is high not low. There is a negative trade balance of f 4% of GDP.As someone who took intro to Econ 101 should know.
Bernanke should print more money. There is no limit to it.
I don't think that number 3 has been done. Because if you look at Core Inflation, it's terrible -- less that 1%.
They refuse to say "we need more inflation., because they don't want to ruffle the feathers of the inflation hawks in congress. And that means that core inflation will never rise to the level they talk about, because we are in a liquidity trap. They have to actually say it to get the effect.
Jim,
If Krugman can quantify in advance what is a needed stimulus I agree he can be falsified. Of course, he can choose a figure that he knows will be politically impossible.
"True economics is NOT politics, no matter what some political thinkers/talkers would have you believe."
Oh, I am a victim of bloggers and cannot form an opinion through reasoning.
First, how come I say that the other business theories have the same weakness? I should be as Austrian as Ron Paul, right?
Second, since you are entirely un-biased yourself and so smart, I will let you explain two weird things with Keynesianism.
Krugman's story with baby-sitting tickets where a ticket on New Years Eve has the same value as on Monday evening on a working day. The fact that no one wanted to baby sit on New Years Eve was taken as proof that the ticket supply needed to be controlled.
This story changed Krugman's life, according to himself.
Why there is a "paradox of thrift" but not a "paradox of spending"? If I save less and spend more I will kick out jobs based on investment. Then those workers will spend less and total spending can not be increased.
Well, I don't get impressed by a theory when its greatest proponents produce child level ideas.
Ugh. Johan, you wrote: "If Krugman can quantify in advance what is a needed stimulus I agree he can be falsified. Of course, he can choose a figure that he knows will be politically impossible." Krugman's figure is not a choice that he pulls out of thin air. It's the conclusion of the Keynes-Hicks Model. It's math, not intuition, and it's certainly not good politics in today's climate.
As for Krugman's story of baby-sitting tickets, you don't ask a question.
Again, you wrote: "Why there is a "paradox of thrift" but not a "paradox of spending"? If I save less and spend more I will kick out jobs based on investment. Then those workers will spend less and total spending can not be increased." Well, there is not a "Paradox of Spending" because there's not a paradox of spending. The picture you paint of an alleged paradox is no paradox if you think macroeconomically rather than microeconomically. Your spending goes into the economy writ large, even if not to those few workers.
Thinking about Macro requires different thinking than Micro.
"Thinking about Macro requires different thinking than Micro."
Yes, there is a difference. Fantasy requires a different thinking than reality.
That's why the absence of "paradox of spending" cannot be explained through reason. You need to use vague statements like "goes in to the economy in large". The "paradox of thrift", though, can be explained on micro level, with the worker that gets sacked. Flower power or science? LOL.
And you couldn't spot the obvious error with the baby-sitting tickets having equal value on New Years Eve and a Monday working day evening. Has Krugman made the correct analysis when he suggests his solution? In this story, Krugman has the intellectual power of a five-year-old.
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