Land of the Rising Sums/May 10, 2013, 8:58 am

Land of the Rising Sums ライジング・サムの国

The good news for Abenomics keeps rolling in; of course, it’s not over until the sumo wrestler sings, but there has clearly been a major change in Japanese psychology and expectations, which is what it’s all about.

Why does this seem to be working as well as it is? Long ago I argued that to gain traction in a liquidity trap, the central bank needed to credibly promise to be irresponsible — that is, convince investors that it would not rein in monetary expansion once the economy was at full employment and inflation was starting to rise. And this is a hard thing to do; no matter what central bankers may say, history shows that they often revert to type at the first opportunity. The examples of successful changes in expectations tend to involve drastic regime changes, like FDR taking us off the gold standard.
なぜ、これが想定どおりに機能していると言えるのか? かなり以前、僕は、流動性の罠の中で牽引力を得るためには、中央銀行は信頼性ある形で無責任になることを約束する必要がある――つまり、いったん経済が完全雇用になり、インフレ率が上昇し始めても金融緩和を抑制しないと投資家に確信させること――と論じた。これは困難なことだ。中央銀行家が何を言おうと、歴史が示すところによると、多くの場合、機会があり次第に彼らは元の状態に戻ってしまった。期待の変化に成功した事例を見れば、フランクリン・ルーズベルトが金本位制から離脱したときのように、劇的なレジームの変化を伴う傾向がある。

And this is where the tsunami-China moral equivalent of space aliens theory comes in: arguably, the shocks of the past two years have changed Japanese perceptions of what must be done enough to make irresponsibility — or, actually, a serious, sustained commitment to higher inflation — credible, at long last.

Meanwhile, Martin Feldstein is demanding an end to the Fed’s efforts to do the same thing, inducing much ire from David Glasner, who accuses Feldstein of failing to grasp the point that it is all about changing inflation expectations. But it’s actually much worse than Glasner says. Here’s Feldstein:

Mr. Bernanke has emphasized that the use of unconventional monetary policy requires a cost-benefit analysis that compares the gains that quantitative easing can achieve with the risks of asset-price bubbles, future inflation, and the other potential effects of a rapidly growing Fed balance sheet.

So, we must stop QE because it might lead to higher inflation — when expectations of (somewhat) higher inflation are precisely the main point of unconventional monetary policy. You might even say that if QE fails, it will because people like Feldstein are doing their best to block the main channel through which it might work.

By the way, Glasner references an earlier Feldstein piece I missed, which is extraordinary in its own way. Feldstein concedes that the problem is inadequate demand, and talks about what we can do:

What is required is action by the president and Congress: to help homeowners with negative equity and businesses that cannot get credit, to remove the threat of higher tax rates, and reduce the out-year fiscal deficits.

OK, I’m for debt relief. But faced with inadequate demand, our only options are to “remove the threat of higher tax rates” and “reduce out-year fiscal deficits” — both of which are basically ways to summon the confidence fairy. Why not, you know, actually have the government spend more now — or, failing that, cut the current taxes of people likely to spend the money? Everything I can see about Feldstein’s economic framework points to fiscal stimulus as the obvious answer; his refusal to consider that possibility has to be entirely, and unforgivably, political.
たしかに、僕も債務免除には賛成だ。でも、不十分な需要に直面しているのに、我々の選択肢が「税率が上がるという恐れを取り除くこと」と「後年度の財政赤字を減らすこと」だけとは――それって基本的に両方とも信頼の天使を召喚するためのおまじないでしょ。なぜ、今、政府支出を増やさないのか――あるいはそれが無理なのなら、お金をもっと使う可能性のある人々に対する減税をやらないのか? フェルドシュタインの経済分析フレームワークは、財政刺激策こそが唯一の答えになることを示しているとしか僕には思えない。彼がその実現性を考えようとしないのは完全に政治的なものであり、それは許されるものではない。

後書き:"it's not over until the fat lady sings(まだまだこれから)"という言葉のthe fat ladyがthe sumo wrestler(相撲レスラー)に変えられています。

Monetarism Falls Short (Somewhat Wonkish)/April 28, 2013, 7:41 am

Monetarism Falls Short (Somewhat Wonkish) マネタリズムには何かが足りない(多少専門的)

The central debate over macroeconomic policy is, of course, between Keynesians and Austerians. And at this point the Keynesians have overwhelmingly won the debate everywhere except where it matters – the intellectual basis for austerity economics has collapsed, but actual austerity continues apace on both sides of the Atlantic.

There have, however, been a couple of side shows, with what I guess now constitutes mainstream Keynesianism – carried forth in public debate by Martin Wolf, Simon Wren-Lewis, Brad DeLong, Jonathan Portes, Paul DeGrauwe, and whatshisface, among others – subjected to non-austerian criticism on both flanks. On the left are the Modern Monetary Theory types, who assert exactly what the austerians like to claim, falsely, is the Keynesian position – that budget deficits never matter (except for their direct effect on aggregate demand). On the right are the market monetarists like Scott Sumner and David Beckworth, who insist that the Fed could solve the slump if it wanted to, and that fiscal policy is irrelevant.

Now, there won’t and can’t be any current-events test of MMT until we get out of the slump, because standard IS-LM and MMT are indistinguishable when you’re in a liquidity trap. But as Mike Konczal points out, we are in effect getting a test of the market monetarist view right now, with the Fed having adopted more expansionary policies even as fiscal policy tightens.

And the results aren’t looking good for the monetarists: despite the Fed’s fairly dramatic changes in both policy and policy announcements, austerity seems to be taking its toll. I would add that the UK experience provides a similar lesson. Mervyn King advocated fiscal consolidation – I’d say that he shares equal responsibility with Cameron/Osborne for Britain’s wrong turn — but more or less promised (pdf) that he would and could offset any adverse effects on growth with monetary policy. He didn’t and couldn’t.

I’m not claiming that there is nothing the central bank can do; but as I’ve tried to explain before, monetary policy can, for the most part, gain traction under current circumstances only by changing expectations about future actions (and changing them a lot). Meanwhile, fiscal policy has a direct, current effect on the economy, which easily trumps attempts to move the economy by changing the Fed’s messaging.

Sorry, guys, but as a practical matter the Fed – while it should be doing more – can’t make up for contractionary fiscal policy in the face of a depressed economy.