"Japan needs to reach a point where everyone believes that it has pulled out of deflation, he said. "And then if that can be believed, then it may be able to stay out of trouble thereafter,” he said."
http://www.bloomberg.com/news/articles/2015-09-10/krugman-says-he-s-really-really-worried-abenomics-might-fail
So if we all just "believe" harder in the mystical powers of the Central Bank then all our troubles will be over. If this isnt some Bull@#$% religious dogma I dont know what is. And these people have the balls to call themselves academics and pretend they are taking part in "science".
34 comments:
The first tax hike and the looming tax hike won't help again. The Corporate tax cut won't offset the damage either.
Japan's problems are mostly demographic, not financial and economic. If you "adjusted" all charts for the shrinking population, the Japanese economy is actually doing remarkably well. I'm not sure that BOJ effectively buying the assets left over from dead people is a good strategy. Allowing the Youth to inherit the stocks, bonds, and real estate instead might give Japanese kids more financial comfort and encourage them to have more children. These are cultural problems that prevent people from making babies. To call them economic is a stretch.
Ryan-
To regular people, what you say makes sense but to the diseased mind of a neo-classical economist all of that is irrelevant and the most important thing is just that people believe that things are better. Because if people believe things are better then they magically will get better. You would make a terrible academic economist!!!!!
What Ryan said. Krugman has never understood what is going on in Japan.
Not just Krugman. It's the whole lot of conventional economists. Krugman is one of the better ones in this in that he at least mocks "the confidence fairy" even though he sometimes reverts to believing in her.
"he at least mocks "the confidence fairy" even though he sometimes reverts to believing in her."
Tom, that is WORSE than not even being able to see "the confidence fairy" in the first place .... he claims to have coined that phrase iirc... this is not a keen intellect we are observing with him....
Again, here with Krugman, we have an ideologue masquerading as a technocrat...
Business confidence is an important factor in whether and how much business investment occurs, and thus in the amount of business demand for labor, resources and capital equipment. But the confidence of real-world business people has, in most cases, nothing to do with inflation expectations; and inflation expectations themselves have little to do with central bank pronouncements. Mainstream economists are ivory tower doodlers who have, in most cases, never participated in a real world business enterprise at any significant way, and live in a theoretical fantasy world of their own construction.
And to the extent that anyone in the public actually believes in the inflation expectations con, its only because of dopes like Krugman and other ideological economists lying to them about it. These people actually believe that managing inflation expectations is an actual real world lever that CBs can pull to manage the economy. You get these sorts of statements from the CBs themselves regularly in their publications. How many times have we heard talk about how we need CBs to set their inflation targets at 4% in order to change inflation expectations thereby changing inflation and thus lowering the real interest rate to its supposed wicksellian equilibrium level and getting ourselves out of this liquidity trap aka secular stagnation. This garbage isnt just some academic doodling or theoretical fantasy world. This is stuff that the actual technocrats believe and are operating the monetary system according to these beliefs. This is some seriously problematic stuff as CBs fund a giant portion of the academic research.
I gave up reading Krugman years ago. He just says the same shit over and over again.
"I gave up reading Krugman years ago. He just says the same shit over and over again."
That's for sure. I don't think the guy has had a single new idea since he wrote his dissertation.
Krugman did change his mind, in November 2012, about the "danger" of fiscal deficits. He said he looked at the data and concluded that the conventional wisdom about our debt was misplaced. That had an enormous impact upon Democratic attitudes, in my opinion.
So it's not as simple as "Krugman is a dope".
Expectations are extremely important. Surely this is just basic Keynesian economics.
The "expectations" the economists talk about have very little to do with real world "expectations" as Dan said.
I have yet to met a single business man who cares about what a central banker says in a significant way, 99.99% of the time (unless they are pulling 'a Volcker' or something like that).
The whole economics profession is a disgrace IMO.
Then add Lerner to your list of dopes: expectstions were a key component of his theory of inflation.
"So it's not as simple as "Krugman is a dope".
imo yes it is.... in fairness, he's not the only one...
Its not that expectations arent important either individually or at the macro level. Its that you cant change anything real in the economy just by changing expectations. You can only change expectations by changing something real in the economy.
IOW expectations arent some lever that you can pull as a central banker to change GDP, consumption, or loan growth in some significant way. Take the case of QE, even if expectations were changed initially due to faulty beliefs about printing money (confusion directly caused by mainstream economics ignorance about banking and monetary operations). Once the markets and economy realized that this type of phony money printing didnt really change anything, then expectations went right back to the fundamentals.
Or ZIRP. The belief is that lower interest rates always spur economic growth so initial expectations are that the economy would improve due to that policy change. But given that the real world net effect of minor interest rate adjustments is ambiguous at best and irrelevant at worst, we can see that expectations are again in this case back to the fundamentals. And the fundamentals are poor, leading to nothing but muddle through stagnation.
Given the current institutional arrangements, with fiscal and regulatory policy responsibility lying (rightfully so) with the legislatures, there is nothing that Central bankers can do to improve the economy. They certainly cant do anything anymore now that they fired their QE gun and everyone knows they're only shooting blanks. So believing that expectations are some real lever that CBs can use is laughable.
Thing is, Auburn, that even if they changed those 'expectations', it wouldn't matter, as the correlation between bullish financial markets (be it junk bonds or higher stock valuations) and economic activity is very loose. And that's the only place where CB's can play some voodoo mindtricks and have a limited temporary effect, sure as hell it won't matter to companies selling goods and services and not shuffling paper at the speed and sending bits from one datacenter to other.
And even if some of the big corporations and banks hear what CB's say, and leverage a little bit more, issue a few more bonds here and there, go on some stock buybacks or whatever financial operations (which they don't)... it's easy to forget that most economic activity is not created by those. And rarely a small, medium or even large company CEO will care about what a crackpot like Bernanke or Greenspan says, just like you don't care about what a politician says when it comes to business plans, unless that politicians is demanding the services you offer. Because that's all what they are in the end, politicians in disguise.
"Its that you cant change anything real in the economy just by changing expectations."
I think you can. It's just that the Fed doesn't have the tools to do it.
If you could spray the country with expectations gas, so that every business owner, CEO and COO woke up tomorrow absolutely convinced that there was going to be a 10% increase in consumer demand across the board during the coming year, then they would all go out and begin raising their output levels to be able to profit from that increase. They would hire more workers, order more raw and finished materials, order more capital equipment, and thus produce a huge surge in demand. And that surge would translate into, if not exactly a 10% increase in demand, at least something in the ballpark.
The problem is the fed can't do this. The number of people who actually pay attention to what the Fed is saying is much smaller than economists tend to believe. And even those who do listen to them take all of their various projections and predictions with a grain of salt. The Fed can't make everybody expect growth just by saying they expect it.
Dan-
right, its up to the legislatures to change fiscal and or regulatory (real) policy. If congress passed a law suspending FICA and they let it be known that they would not reinstate all or some of the tax until the economy got down to 3% UE or 4% inflation you can guarantee that expectations will increase due to the more than $1 trillion in extra income the private sector would have to spend. But again, this would be an example of changing expectations by changing something real, not changing something real by changing expectations.
It might be easier and better for the government to just buy the stuff that needs to be bought itself, instead of trying to "stimulate" the economy again with a consumption demand boost. Overall US spending has shifted over the past several decades from about 65% consumption/GDP to 70% consumption/GDP, with a decline in both national government investment and long-term business investment. That's one reason we are stagnating as a country. That kind of neglect of the long term and failure to defer immediate-term consumption desires for the sake of longer-term economy building and society building is one of the pathologies of the neoliberal way of life. We can't emerge from our peristent and decadent stagnation by just giving people money to buy more consumer crap.
While I disagree with your characterization of consumer spending as buying crap. As your definition of refuse in this case is my definition of the good life :)
More golf
More restaurants\bar visits
More vacations (fishing trips)
New truck w better gas mileage (to pull the boat on the fishing trip)
Better TVs and electronics
Steak
Lobster
New Boats
RVs
Better Fishing tackle and electronics
better camping gear
These are some of my favorite things
With that said, I do agree with you that I'd prefer a $500B a year increase in Govt investment in desalination, renewable energy, new airports, high speed rail, basic R&D, more telescopes, probes, satellites etc, over a $500 B tax cut. I was just using FICA to make a point in response to your increase business expectations example.
Aubern,
Lerner explicitly argued expectational inflation (inflation III) was a central component of the inflationary depression experienced in the late 1960s early 1970s. Because price administrators expected their profits to fall as a consequence of rising costs they defended their profit levels by continually increasing prices to compensate. In response wage administrators bid up labor prices exacerbating the problem. This process was interrupted only by Phase One of the Nixon Administration's wage and price controls.
Yup, that's the same point made by the old neo-keynesians who sat through Krugman's presentation of his 1998 Japan paper: expected inflation is inertial and depends mostly on current and past inflation, which is itself the result of the interplay of supply of demand for goods and services. Inflation expectations resulting from central bank credibilty is a fairy tale. He's starting to get it, though. We need him to change his mind on this point too.
Auburn Yeah!
This ones for you:
https://www.youtube.com/watch?v=mQPjKSVe1tQ
"promote to post please!"
;)
"While I disagree with your characterization of consumer spending as buying crap. As your definition of refuse in this case is my definition of the good life :)"
Exactly.
Next thing you know, Dan will start advocating for a BIG.
"If you could spray the country with expectations gas, so that every business owner, CEO and COO woke up tomorrow absolutely convinced that there was going to be a 10% increase in consumer demand"
You can. It's called 'placing orders'.
In other words promise to buy stuff from them.
It's the sales pipeline stupid.
If the government stimulated consumption we would be back to square one in a few months as inflation would start to go above wages. This is what was used an excuse a few decades to start the current trends...
Consumption doesn't increase productivity or efficiency. I would rather see governments invest to solve supply side problems (because the private sector won't do what is necessary by itself as is a much easier solution to increase inequality to solve that problem as history demonstrates) and build up capital than boosting consumption. Consumption will follow as that money flows into the pvte sector anyway as long as the right enterprises are incentived. Supply side problems are real and need fixing.
"Because price administrators expected their profits to fall as a consequence of rising costs they defended their profit levels by continually increasing prices to compensate."
That is dealt with by increasing competition. If you guaranteed that any industry that raised prices would be subject to competition authority investigation and the break up of the businesses into a more competitive structure then you would find that some of those people would start to look at investment and process reorganisation to respond to rising costs.
And it only takes one or two to break ranks to put all the other businesses on notice that they will be losing market share.
If you let people know that rising prices will be considered a signal of oligopoly and bureaucrats crawling all over them like a police investigation there would be far more circumspection about price rises.
"Consumption doesn't increase productivity or efficiency."
Yes it does, because those orders stimulate investment and process reorganisation - particularly if the supply side is tight and the competitive environment fierce.
There is absolutely no reason to invest in anything unless you have sufficient consumption projected to absorb the new output.
You need production to produce productivity.
Krugman keeps getting it wrong because he looks constantly at the wrong side of the fence.
"The sellers of that government debt don’t want to sit on idle cash, so they lend it out, stimulating spending and boosting the real economy. "
No they don't. The sellers of government debt are selling because they want to buy something else. Otherwise why are they selling? Their behaviour is *unaltered* by the government offering bids into the market. They were selling anyway.
So by definition QE has no effect on the sell side of government securities. They are being sold because a pensioner needs an income this week, or whatever.
The effect that QE has is on the *buy* side of government securities. Somebody who wanted a nice safe security was outbid by the government. So they are going to go to the next safest option - which is put the money on deposit. They are not going to lend their money to anybody else - because they already rejected that option. That's why they were bidding in the government debt market.
So it stays on deposit. (Because the bank with the reserves was outbid as well, so the reserves stay on deposit at the central bank). And as we all know that is where money goes to die.
There is no increase in lending. Lending is borrower driven.
QE alters asset prices back to what they would have been if the bond issue hadn't happened. It is messing around with trying to persuade people to borrow money.
Lerner thought the desire to avoid a crippling depression meant spending administrators would ultimately accomodate whatever price level the corporate behemoths demanded. The political necessity would always push the competitive aspect to the back burner.
Franko-
Never heard that song before.....awesome!
It's not a linear relation. Business are conservative and don't invest if it's not necessary or risky, very rarely engage in the type of investment and research that we need right now to solve supply side problems.
Those aren't problems that can be solved in weeks, months or even a few years, they require the government being a big partner on pushing investment and research. Business HAVEN'T been solving supply side problems in the last 10 years, when there was higher demand for many goods, instead they will pass inflation into consumers with an ever lowering purchasing power and the govt will help hiding those costs (energy and food) with dubious weighting on the indexes (housing and mortgages). With increasing demand worldwide the prices were not decreasing and average wages were stagnant (now is not different). Business won't either invest in the necessary supporting infrastructure and systems to keep the whole thing working.
Instead you can get a 'crappification' of the social fabric and the build up of consumer ghettos ala S.A. or Asia where the costs are passed onto the population while others enjoy a relatively comfortable live, protected from inflation because they are asset owners. (That is the normalization through inequality.)
Matt/Auburn,
I could definitely use a few $100 more a month in my paycheck too... The Mariner Eccles (my boat) could def use a new paint job!
It might be easier and better for the government to just buy the stuff that needs to be bought itself, instead of trying to "stimulate" the economy again with a consumption demand boost.
Buffers.
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