Recessionomics: Can We Spend Our Way Out of a Recession?
January 9th, 2009 by Cooper Levey-Baker in News, Politics
Ed. note: This piece, by Wayne Garcia, will appear in next week’s issue of Creative Loafing.
President-elect Barack Obama doesn’t just think we can; he believes it’s the only way to avoid a years-long crushing of the U.S. economy and way of life. In a speech last week, he said, “At this particular moment, only government can provide the short-term boost necessary to lift us from a recession this deep and severe. Only government can break the vicious cycles that are crippling our economy.”
But is he right?
The answer depends on your political ideology, and on which economist you believe.
It is conservative dogma that more government spending is bad, depressing the free markets and individuals’ ability to spend and invest their own money in ways they see fit. To conservatives such as Victor Davis Hanson of National Review, the word “stimulus” should be replaced with the words “borrow” or “debt.” On the other side, it is liberal dogma that government has a role in supplementing and policing the free market, especially in tough times.
So let’s turn to a foreign voice, someone not entirely caught up in the scrum of U.S. politics. Let’s see what Richard C. Koo, the author of The Holy Grail of Macroeconomics: Lessons from Japan’s Great Recession and chief economist for the Nomura Research Institute in Tokyo, has to say about such things. (OK, yes, the Taiwanese national is also a U.S. citizen who has done quite a bit of work here in the States and was with the Federal Reserve Bank of New York, but just hear me out, people.)
Koo’s book examines how Japan fixed its economy in the 1990s, when its condition was similar to what the rest of the world is experiencing today. His solution, as boiled down by a writer for Canada’s The Globe and Mail: “Spend, spend big, spend till it hurts and when you are tired of spending, spend some more.”
The problem in this recession is that the flow of money and credit is impeded by companies and individuals who are either hoarding cash to pay down debt and realign their balance sheets or have lost confidence in the financial institutions that keep cash flowing. Koo’s book describes it this way: “There are actually two phases to an economy, the ordinary (or yang) phase, in which the private sector is maximizing profits, and the post-bubble (or yin) phase, in which private sector is minimizing debt, or repairing damaged balance sheets. Although conventional economics is useful in analyzing economies in the yang phase, it is less useful in explaining phenomena such as the ‘liquidity trap’ that is typical of an economy in the yin phase. The distinction between the yin and yang phases also explains why some policies work well in some situations but not in others.”
Koo’s solution for the current global and U.S. recession: Turning Japanese.
“By administering the fiscal stimulus, which was also the right thing to do, the [Japanese] government succeeded in preventing a catastrophic decline in the nation’s standard of living despite the economic crisis,” Koo wrote. “In this sense, it could be argued that Japan’s fiscal stimulus was one of the most successful economic policies in human history.”
January 10th, 2009 at 5:07 pm
Is Koo out of his mind? Since when was the Japanese stimulus plan a success? Even 10 to 15 years after the fact, the Nikkei index is still lower than it had been in the late 1980s and early 1990s.
There are two ways a government can finance lofty programs such as these: an increase in taxes or by borrowing.
Taxes are out of the question, and other nations, namely China, will eventually stop purchasing t-bills from a borrower that has no intention of repaying.
So, where is the money going to come from? The Federal Reserve is going to print it, and the U.S. dollar will sink like a stone. Want to know what our future will look like? Take a look at Zimbabwe, where $20 billion dollars buys you a loaf of bread.
If centrally-planned economies have consistently failed in the past, why the hell do we think this time will be any different?
January 12th, 2009 at 9:02 am
It seems like Koo’s point is that Japan was able to, at the very least, prevent “a catastrophic decline in the nation’s standard of living despite the economic crisis.”