Why oh why can't we have a better press corps?
Bill Galston writes in--surprise, surprise--the New Republic:
The Case Against Keynes (With Some Questions For Krugman, Too): oshihiro Ihori, Masume Kawade, and Toru Nakazato.... “One hypothesis is that the effects of fiscal policy were very large and hence recession would have deepened without fiscal expansion. Alternatively, it may be that fiscal policy did not have enough of an expansionary effect to push up macroeconomic activity, and hence unlimited public expenditures simply made the fiscal crisis worse.”... [T]hey concluded that the second hypothesis is far more plausible than the first...
It’s not clear whether Krugman would accept this conclusion...
Had Galston done his homework, he would know that he is wrong: it is very clear indeed that Paul Krugman does not accept this conclusion.
Had Galson surfed to google.com, entered "site:krugman.blogs.nytimes.com japan fiscal policy" into the search box, and pressed the "I'm Feeling Lucky" button, he would have found:
Inflation, Deflation, Japan: ...a very insightful talk (pdf) by Adam Posen, my favorite Japan expert (and now on the policy board of the BOE). There’s a lot in this talk... the effects of Japan’s “quantitative easing” policy, which involved pushing up the monetary base in the hope of getting some traction.... [T]his has a moral beyond not to worry about inflation. It’s also a reminder that it’s hard to make monetary policy effective in a liquidity trap. There are some writers who suggest that all we need is more determination on the part of Bernanke et al; while I dearly wish the Fed would try harder, it’s not all that easy, because just pushing out money doesn’t do anything. You either have to buy lots of long-term assets — we’re talking multiple trillions here — or credibly commit not just the current FOMC, but future FOMCs, to pursuing higher inflation targets.
Part of the argument for fiscal policy as a response to this crisis is precisely that it doesn’t pose the same kind of commitment problems — a point that Gauti Eggertssson has made at length, e.g. here (pdf). On the contrary, a surge in government purchases of goods and services is more, not less, effective if the public believes that it’s only temporary.
Anyway, studying Japan remains very useful for understanding where all of us are these days.
Paul has long taken Adam Posen as his guru in understanding what happened to Japan after the crash of its real estate bubble:
People should be reading Adam Posen: Everyone’s looking back to the 1930s for policy guidance — and that’s a good thing. But we don’t have to go back that far to see how fiscal policy works in a liquidity trap; Japan was there only a little while ago. And Adam Posen’s book, especially Chapter 2, "Fiscal Policy Works When It Is Tried," is must reading right now.