Tuesday, December 16, 2008

We're all Keynesians now

I no longer expect any good news when I read about the economy in Japan, in the US, in Britain, or anywhere. In fact, the only good day is when there is no new disaster.

On the weekend when Lehman collapsed and Merill Lynch was sold, I knew that the world had changed. (I also had the rather weird thought that there would be some really interesting books written about what went on during that weekend that I could read in about 6 months.) Since then so many things that I mostly took for granted have been proven to have been nothing but a sort of poorly made virtual reality. For example, I knew free markets were not exactly "free," but I did not expect that so many proponents of the unrealized paradise of mythical free markets would become sudden converts to open, aggressive government "intrusion" into the market.

There has been one bright spot though. Paul Krugman has returned to his day job doing what he does best, Keynesian economics, instead of using his NYT column to connect every single problem on earth to Boy George.

D.C. What did Japan do wrong in the 90's and how can we avoid the same fate?

Paul Krugman: To be honest, I think US economists are feeling a bit more respect for the Japanese, or at least sympathy for their plight. Avoiding a Japan-type experience is proving harder than most economists thought -- even economists like Ben Bernanke, who'd worked hard on analyzing Japan.

But the big message I take from Japan's experience is the folly of excessive caution. If you're half-hearted about taking on the slump -- if you wait to cut interest rates, nickel-and-dime your fiscal stimulus, penny-pinch on your bank bailouts -- then by the time you realize more is needed, deflation has set in, and it's really hard to get out of the trap.

So you want to be really, really aggressive on policy early on. Transcript of Washington Post interview/discussion here.

I think we are all a little more sympathetic---certainly less condescending---to what Japan went through in the 90s. And a little more Keynesian.

Link to the Keynes essay that Krugman mentioned: The Great Slump of 1930

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