Krugman on why the U.S. and Europe have blundered far worse than Japan
Here’s some bad news: The U.S. and Europe now arguably have supplanted Japan as the world’s role models for mishandling an economic crisis. So Prof Paul Krugman argued in his column in the New York Times on 31 October.
In his “Apology to Japan”, Krugman points out that the western countries have managed to fall into a slump deeper than Japan’s economic down- turn two decades ago and, worse still, haven’t learned a damn thing from Japan’s example on how to handle it.
That wasn’t supposed to happen. In the 1990s, it was assumed that if the United States or Western Europe had found themselves facing anything like Japan’s problems, they would respond much more effectively than the Japanese had. But they didn’t, even though they had Japan’s experience to guide them.
On the contrary, the policies of these countries since 2008 have been so inadequate if not actively counter- productive that Japan’s failings seem minor in comparison. And workers in Europe and the U.S. have experienced a level of suffering that Japan has managed to avoid.
Krugman then gives the litany of totally preventable policy failures starting with government spending. Here, too, Japan’s example is instructive. In the early 1990’s, Japan tried to goose its economy with a surge in public investment, Krugman recounts. This was good, but Japan abruptly ended that approach in 1996, and the recovery stalled. “This was a big mistake” he writes. “But it pales by comparison with Europe’s hugely destructive austerity policies, or the collapse in infrastructure spending in the United States after 2010. Japanese fiscal policy didn’t do enough to help growth, but fiscal policy in the U.S. and Europe actively destroy- ed growth”.
Europe has also made catastrophic mistakes with monetary policy, he writes, especially with the European Central Bank’s decision to raise rates in 2011, and Sweden’s worse mistake of raising rates at the wrong time and sending the country into “outright deflation”.
All of these ill-advised policies have been chosen against the advice of economists and other experts, so the question, once again, is why? Why do countries do things that fly in the face of history, the study of which is supposed to prevent people and governments from making the same mistakes again, or even worse mistakes?
Krugman deepens his analysis to answer this question, because he truly would like to understand and shed light on it. This is the question, we sense, that really keeps him up at night. Here’s what he comes up with:
Responding effectively to depression conditions requires abandoning conventional respectability. Policies that would usually be perceived to be prudent and virtuous, like balancing the budget or taking a firm stand against inflation, become recipes for a deeper slump.
And it’s very hard to persuade influential people to make that adjustment – just look at the Washington establishment’s inability to give up on its deficit obsession.
As for why western countries have done even worse than Japan, I suspect that it’s about the deep divisions within our societies. In the U.S., conservatives have blocked efforts to fight unemployment out of a general hostility to the role of government, and especially a government that does anything to help Those People. In Europe, Germany has insisted on hard money and austerity largely because the German public is intensely hostile to anything that could be called a bailout of southern Europe.
Janet Allon is assistant managing editor and a regular columnist with Alternet.org, and was previously editor at Avenue Magazine, Contributing Editor at DirecTV Magazine/ Meredith Publishing, and Contributing Editor at NYU.
Editorial comment: In regard to his emphasis in this article on “growth”, it is to be hoped that Paul Krugman is not refering to GDP growth, however we suspect that this is not the case. Like many other neoclassical economists (even though he dwells on the outer fringes of the main- stream), Paul Krugman seems not to recognise that any growth of industry and consumer goods based on the burning of carbon-based fuels (with or without recycling) is not compatible with a sustainable future for humanity. Even if the emission of greenhouse gases could be satisfactorily capped or removed altogether, the problem remains that the world is steadily running out of oil, upon which our entire economy currently depends.. On the other hand, if by using the word “growth” he is referring to the growth in service and other Industries which do not need to burn large quantities of carbon-based fuels, either directly or indirectly, then he is making some valid and important points.