For three years economic policy throughout the advanced world has been paralyzed, despite high unemployment, by a dismal orthodoxy. Every suggestion of action to create jobs has been shot down with warnings of dire consequences. If we spend more, the Very Serious People say, the bond markets will punish us. If we print more money, inflation will soar. Nothing should be done because nothing can be done, except ever-harsher austerity, which will someday, somehow, be rewarded.
However, now it seems that one major nation is breaking ranks — and that nation is, of all places, Japan.
This is not the maverick we were looking for. In Japan governments come and governments go, but nothing ever seems to change — indeed, Japanese Prime Minister Shinzo Abe has had the job before and his party’s victory in recent elections was widely seen as the return of the “dinosaurs” who misruled the country for decades. Furthermore, Japan, with its huge government debt and aging population, was supposed to have even less room for maneuver than other advanced countries.
However, Abe returned to office pledging to end Japan’s long economic stagnation and he has already taken steps orthodoxy says we must not take. The early indications are that it is going pretty well.
Some background: Long before the 2008 financial crisis plunged the US and Europe into a deep and prolonged economic slump, Japan held a dress rehearsal in the economics of stagnation. When a burst stock and real-estate bubble pushed Japan into recession, the policy response was too little, too late and too inconsistent.
To be sure, there was a lot of spending on public works, but the government, worried about debt, always pulled back before a solid recovery could get established and by the late 1990s persistent deflation was already entrenched. In the early 2000s the Bank of Japan, the counterpart of the US Federal Reserve, tried to fight deflation by printing a lot of money. It, too, pulled back at the first hint of improvement and the deflation never went away.
That said, Japan never had the kind of employment and human disaster that the US have experienced since 2008. Indeed, our policy response has been so inadequate that I have suggested that US economists who used to be very harsh in their condemnations of Japanese policy — a group that includes US Federal Reserve Chairman Ben Bernanke and, well, me — visit Tokyo to apologize to the emperor. We have, after all, done even worse.
And there’s another lesson in Japan’s experience: While getting out of a prolonged slump turns out to be very difficult, that is mainly because it is hard getting policymakers to accept the need for bold action. That is, the problem is mainly political and intellectual, rather than strictly economic. For the risks of action are much smaller than the Very Serious People want you to believe.
Consider, in particular, the alleged dangers of debt and deficits. Here in the US, we are constantly warned that we must slash spending now, now, now or we will turn into Greece, Greece I tell you. However, Greece, a country without a currency, does not look much like the US; surely Japan offers a more relevant model. And while doomsayers keep predicting a fiscal crisis in Japan, hyping each uptick in interest rates as a sign of the imminent apocalypse, it keeps not happening: Japan’s government can still borrow long term at a rate of less than 1 percent.
Enter Abe, who has been pressuring the Bank of Japan into seeking higher inflation — in effect, helping to inflate away part of the government’s debt — and has also just announced a large new program of fiscal stimulus. How have the market gods responded?
The answer is, it is all good. Market measures of expected inflation, which were negative not long ago — that is, the market was expecting deflation to continue — have now moved well into positive territory. Government borrowing costs have hardly changed at all; given the prospect of moderate inflation, this means that Japan’s fiscal outlook has actually improved sharply. True, the foreign-exchange value of the yen has fallen considerably — but that is actually very good news and Japanese exporters are cheering.
In short, Abe has thumbed his nose at orthodoxy, with excellent results.
Now, people who know something about Japanese politics warn me not to think of Abe as a good guy. His foreign policy, they tell me, is very bad and his support for stimulus may have more to do with old-fashioned pork-barrel (tofu barrel?) politics than with a sophisticated rejection of conventional wisdom.
However, none of that may matter. Whatever his motives, Abe is breaking with a bad orthodoxy. If he succeeds, something remarkable may be about to happen: Japan, which pioneered the economics of stagnation, may also end up showing the rest of us the way out.