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Unlikely economic threats creating actual economic problems

The economic danger that people are best able to imagine is some form of collapse. The financial system goes the way of Lehman. The government goes the way of Greece. So far as calamities go, these are pretty simple ones, and noticeable enough that we can all call up examples. We've also been taught to fear inflation, as that was the big problem in the '70s, and is also what the Federal Reserve takes to be its archenemy.

But as Paul Krugman argues today, neither collapse nor inflation is the most relevant threat. That, instead, is Japan: a country that isn't some economic hellhole, but nevertheless has experienced a long period of unnecessarily low economic growth and high unemployment owing to a long period of unnecessarily stifled demand.

The problem here is that some of the things you do to combat fears of debt crises and inflation cut against some of the things you do to avoid becoming Japan. In April, for instance, we had deflation. But the New York Times is writing articles trying to get the Federal Reserve to implement policies to prevent its opposite, inflation. And if the Federal Reserve does that, it'll choke off the recovery.

Similarly, we're still in a period where it makes sense to increase deficits in order to increase economic demand in order to get the country back to work and the juices flowing through the economy again. But sharp fears over deficits -- which are a long-term problem, but not a short-term problem -- are preventing policymakers from moving in that direction. "Fear of imaginary threats has prevented any effective response to the real danger facing our economy," sighs Krugman.

By Ezra Klein  |  May 21, 2010; 10:44 AM ET
Categories:  Economic Policy  
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Next: Three types of arguments over policy

Comments

surprisingly Japanese unemployment rate has been very very low even now..its 5%..despite all its problem..its close to what US had in boom times

Posted by: amritpalsidhu | May 21, 2010 12:30 PM | Report abuse

Here are my thoughts on how and why the Fed sets rates, and what interest rates "should" be if only market forces were involved.

http://squashpractice.wordpress.com/2010/05/14/inflation-and-the-risk-free-interest-rate/

Posted by: grondeau | May 21, 2010 12:38 PM | Report abuse

What we really need is to end the tax and spend policies that skew ever more of our resources to the very wealthy. Not redistribuition so much as changing the direction of redistribution. When things are more equal, people who spend have more money to spend, and we have prosperity like we had in the early '90s and the '60s before the Vietnam War ate the budget. Since about 1995 ever more has gone to the top 1% who squirrel it offshore or spend it on luxury goods that just recycle it to other very wealthy people.

It is an enduring myth, but a myth nonetheless, that if we give money to the very rich they will invest it and make all of us better off. Rather, the more money that finds its way to the other 99%, especially the lower 50%, the more will be spent on actual goods and this demand will create jobs.

We missed the boat after 9/11 and qwe are missing it once again. We need to stop giving everything to the people who need it the least and make things more equitable. We are now a country with far less opportunity, far fewer services and far more time spent on work than the other industrialized countries. It is only the ignorance of our populace about the rest of the world that prevents them from understanding, and changing, this.

Posted by: Mimikatz | May 21, 2010 1:18 PM | Report abuse

Maybe its like that 30Rock episode last night---you just have to choose a direction...you know, if there's a fork in the road, take it.

Posted by: Texican1 | May 21, 2010 1:31 PM | Report abuse

Japan let a 2% surplus in 1990 become an 11% deficit in 1998, and with an exception of 2006-2008, it has run deficits of 6.2%+ of GDP since then.

Stateside, we had a deficit of 1.2% of GDP in 2007 and now it is ~10%. Last decade we took a 2% surplus and we ran deficits up to 3.5% of GDP as unemployment rose 2.5% over the 2000-2003 period, deficits .

It's not as if the run-a-deficit strategy hasn't been tried in either place.

How much larger deficits do we need? I don't think we can raise the existing deficit much further. After all, we do have to get the deficit back down to ~3% of GDP or so. Wouldn't parring down the deficits have an equal and opposite effect after the stimulus phase? Also, what happens if we put the deficit up to 15% of GDP, and despite it all we end up with a double dip recession - do we prevent the deficit from rising further, or do we take it to 20%?

Agreed that debt and inflation aren't imminent threats, but running the deficit higher by several percentage points of GDP seems risky to me.

By the way, Krugman was much less sanguine about much smaller deficits during the Bush years. Even deficits related to extra defense spending (which a Keynesian should believe stimulative to the economy, even if you opposed the war).

http://www.democracynow.org/2004/12/21/paul_krugman_on_social_security_the

Posted by: justin84 | May 21, 2010 2:05 PM | Report abuse

"Similarly, we're still in a period where it makes sense to increase deficits in order to increase economic demand in order to get the country back to work and the juices flowing through the economy again. "

Wrong, Klein. We increase deficits by borrowing money. When there are more "low risk" government bonds that need to be sold, there is less money available for the corporate bond market. Second, this makes the future worse. The 14% of the budget going to pay just the interest on the debt by 2020 is taking some money away from real programs. Now, it's not a zero sum game here, if parties are lending money to the government, they are not lending money to someone else.

Do you actually think that lending money to the government is a better allocation of resources than lending it to a business?

Posted by: staticvars | May 21, 2010 8:58 PM | Report abuse

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