- Paul Krugman: Business vs. Economics
- Links for 11-03-14
- Fighting the Last (Macroeconomic) War
- 'The Impact of the Maturity of US Government Debt on Forward Rates and the Term Premium'
Posted: 03 Nov 2014 12:24 AM PST
Should policymakers listen to business leaders?:
Business vs. Economics, by Paul Krugman, Commentary, NY Times: The Bank of Japan ... has lately been making a big effort to end deflation, which has afflicted Japan's economy for almost two decades. At first its efforts — which involve printing a lot of money and, even more important, trying to assure investors that it will keep printing money until inflation reaches 2 percent — seemed to be going well. But more recently the economy has lost momentum, and last week the bank announced new, even more aggressive monetary measures. ...
While the bank did the right thing, however,... the new stimulus was approved by only five of the bank board's nine members, with those closest to business voting against. Which brings me to the subject of this column: the economic wisdom, or lack thereof, of business leaders.
Some of the people I've spoken to here argue that the opposition of many Japanese business leaders to the Bank of Japan's actions shows that it's on the wrong track. ... Actually,..., business leaders often give remarkably bad economic advice... Why? ...
National economic policy, even in small countries, needs to take into account kinds of feedback that rarely matter in business life. For example, even the biggest corporations sell only a small fraction of what they make to their own workers, whereas even very small countries mostly sell goods and services to themselves.
So think of what happens when a successful businessperson looks at a troubled economy and tries to apply the lessons of business experience. He or (rarely) she sees the troubled economy as something like a troubled company, which needs to cut costs and become competitive. To create jobs, the businessperson thinks, wages must come down, expenses must be reduced; in general, belts must be tightened. And surely gimmicks like deficit spending or printing more money can't solve what must be a fundamental problem.
In reality, however, cutting wages and spending in a depressed economy just aggravates the real problem, which is inadequate demand. Deficit spending and aggressive money-printing, on the other hand, can help a lot.
But how can this kind of logic be sold to business leaders, especially when it comes from pointy-headed academic types? The fate of the world economy may hinge on the answer.
Here in Japan, the fight against deflation is all too likely to fail if conventional notions of prudence prevail. But can unconventionality triumph over the instincts of business leaders? Stay tuned.
Posted: 03 Nov 2014 12:06 AM PST
Posted: 02 Nov 2014 09:56 AM PST
Fighting the last war: It is often said that generals fight the last war that they have won, even when those tactics are no longer appropriate to the war they are fighting today. The same point has been made about macroeconomic policy: policymakers cannot avoid thinking about the dangers of rising inflation, and in doing so they handicap efforts to fully recover from the Great Recession.
Another military idea is the benefit of using overwhelming force. In the case of inflation we have two legacies of the last war that are designed to prevent inflation reaching the heights of the late 1970s: inflation targets and in many countries independent central banks. Do we need both, or is just one sufficient? I think this question is relevant to the debate over helicopter money (financing deficits by printing money rather than selling debt).
Why are helicopter drops taboo in policy circles? Why is it illegal in the Eurozone? The answer is a fear that if you allow governments access to the printing presses, high inflation will surely follow at some point. ...
I think...: yes, in the grand scheme of things we should worry about inflation and debt, but right now we are worrying about them too much and therefore failing to deal with more pressing concerns.
Posted: 02 Nov 2014 09:56 AM PST
At Vox EU:
The impact of the maturity of US government debt on forward rates and the term premium: New results from old data, by Jagjit Chadha: Summary The impact of the stock and maturity of government debt on longer-term bond yields matters for monetary policy. This column assesses the magnitude and relative importance of overall bond supply and maturity effects on longer-term US Treasury interest rates using data from 1976 to 2008. Both factors have a significant impact on both forwards and term premia, but maturity of public debt appears to matter more. The results have implications for exit from unconventional policies, and also for the links between monetary and fiscal policy and debt management.
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