Paul Krugman on Why the West Has Messed Up 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 Paul Krugman argues in his Friday column in the New York Times.
In his "Apology to Japan," Krugman points out that the West has managed to fall into a slump deeper than Japan's economic downturn two decades ago and, worse still, hasn't learned a damn thing from Japan's example about how to handle it.
That wasn’t supposed to happen. In the 1990s, we assumed that if the United States or Western Europe found themselves facing anything like Japan’s problems, we would respond much more effectively than the Japanese had. But we didn’t, even though we had Japan’s experience to guide us. On the contrary, Western policies since 2008 have been so inadequate if not actively counterproductive that Japan’s failings seem minor in comparison. And Western workers 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," Krugman 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; Western fiscal policy actively destroyed growth."
Europe has also made catastrophic mistakes with monetary policy, Krugman 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 actual economists and 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 worse mistakes?
Responding effectively to depression conditions requires abandoning conventional respectability. Policies that would ordinarily 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 the West has done even worse than Japan, I suspect that it’s about the deep divisions within our societies. In America, conservatives have blocked efforts to fight unemployment out of a general hostility to government, 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.
So, there it is. Japan, Krugman regrets to inform you, is no longer the world's most cautionary tale.