Paul Krugman Exposes the Folly of Running the Country Like a Business
America holds its corporate chieftains in such high regard that it looks to them to solve the country's most dire economic problems. This does not always work out. Paul Krugman analyzes why in his column Monday.
Krugman begins by looking at Japan, where the central bank announced more aggressive money measures to fight deflation last week, a move which Krugman supports and Japan's business elite adamantly opposes. Krugman takes the opportunity to examine the whole question of "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. In saying this, they’re echoing a common sentiment in many countries, including America — the belief that if you want to fix an ailing economy, you should turn to people who have been successful in business, like leaders of major corporations, entrepreneurs and wealthy investors. After all, doesn’t their success with money mean that they know how the economy really works?
Actually, no. In fact, business leaders often give remarkably bad economic advice, especially in troubled times. And I think it’s important to understand why.
Krugman scores point after point as he illuminates just how wrong wealthy money managers and corporate chieftains have been about monetary policy in this country. When the Fed tried to boost the economy by printing more money, these business interests frantically warned about currency debasement, and hyperinflation, neither of which ever arrived. They harped away on fixing the debt and cutting spending as ways to grow the economy. Did. Not. Work.
On the other hand, when decisions have been left to economists with more academic credentials as opposed to business success—like Ben Bernanke, Janet Yellen, Mervyn King, and in Europe, Mario Draghi—who have ignored or defied the advice of business leaders, things have gone a bit better. Still, Krugman hastens to point out, "Obviously there are business leaders who have gotten the economic analysis right, and plenty of academics who have gotten it wrong. (Don’t get me started.) But success in business does not seem to convey any special insight into economic policy. Why?"
The reason, in a nutshell, is contained in paper Krugman wrote many years ago. A country is not a company. He writes:
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.
A country that lets its corporate leaders call the shots is on a path to ruin. Listen up Japan. And us.