Lessons from Japan on fiscal stimulus?

Paul Krugman's thoughts on Japan from around a decade ago are quite interesting.  He wrote:

But it is quite a stretch to argue that Japan in the 90s is a parallel case [to the US from the Great Depression through World War II]. It might be; but an at least equally, if not more, plausible story is that Japan has a structural excess of saving over investment, even at a zero interest rate; in that case a temporary fiscal stimulus will produce only temporary results.

What continues to amaze me is this: Japan's current strategy of massive, unsustainable deficit spending in the hopes that this will somehow generate a self-sustained recovery is currently regarded as the orthodox, sensible thing to do - even though it can be justified only by exotic stories about multiple equilibria, the sort of thing you would imagine only a professor could believe. Meanwhile further steps on monetary policy - the sort of thing you would advocate if you believed in a more conventional, boring model, one in which the problem is simply a question of the savings-investment balance - are rejected as dangerously radical and unbecoming of a dignified economy.

The "exotic" multiple-equilibrium story must not really be that exotic, since just above this he entertains it as an explanation of the 1996 Asian financial crisis, and of the apparent success of WWII spending in lifting the US sustainably out of depression.

The current situation certainly differs from Japan's in the 90's in many ways, but it does raise the question which of those ways are likely to render fiscal policy more effective for us now, than for Japan then.  Of course, I think no-one would argue that we have a structural excess of savings over investment.  But it does appear that the propensity to save may have shifted up at least temporarily.  Do we face an S-shaped consumption-income relation?  If this slump drags on too long, will we need to target inflation?

At the time Krugman wrote these pieces, he felt the multiple-equilibrium possibility looked dubious because there had been prolonged fiscal stimulus, but it  hadn't rendered itself unnecessary.  Others (see the article linked below) think apparently think it just wasn't large enough, and intense enough over a short period of time, to succeed.  And there are those who think that Japan didn't clean up its banking problem effectively---that its banks still had the balance sheet problems that, Krugman argues, fiscal stimulus can provide breathing room to work out.

Greg Mankiw links to an interesting article on Japan, that largely confirms the continuance of the situation Krugman described in 1999---fiscal stimulus not having rendered itself unnecessary by producing a self-sustaining recovery.  Make sure and read past the first page.  It would be interesting to further investigate the content, and methodology, of the Institute for Local Government study that concluded:

every 1 trillion yen, or about $11.2 billion, spent on social services like care for the elderly and monthly pension payments added 1.64 trillion yen in growth. Financing for schools and education delivered an even bigger boost of 1.74 trillion yen, the report found. But every 1 trillion yen spent on infrastructure projects in the 1990s increased Japan’s gross domestic product, a measure of its overall economic size, by only 1.37 trillion yen, mainly by creating jobs and other improvements like reducing travel times.

Mankiw has his own suggestion for a stimulus plan, about which a bit more in the next post.

Niall's back with an extra dose of Keynes-bashing, but now Brad's on the case

In an LA times editorial, Niall Ferguson augments his Feb. 2 Financial Times piece, which I commented on earlier, with much more explicit Keynes-bashing and fiscal-stimulus-dissing.  This time, Brad's on the case.

Long Treasury yields did rise a bit (roughly from just under 3, to just over 3.5, percent over the last few weeks), and there was similar if less pronounced movement across the longer end of the curve, so maybe we shouldn't count on financing the whole stimulus at todays low rates---though I couldn't tell you if this is a response to the clear likelihood of a stimulus package, which I would have thought would have been priced in for a while now.  But if we're getting output closer to potential, sooner, with the stimulus, we're increasing the overall stream of real output that the Treasury will have avaible to tax to pay these things back---increased indebtedness being met with increased debt-servicing capability.  Maybe not one-for-one, although that cuddly, big-eyed multiplier sure helps.  The cuddly reference:  "Uneasily aware that their discipline almost entirely failed to anticipate the current crisis, they seem to be regressing to macroeconomic childhood, clutching the Keynesian "multiplier effect" -- which holds that a dollar spent by the government begets more than a dollar's worth of additional economic output -- like an old teddy bear."---Ferguson from the LA Times piece.)  Among the most multiplier-besotted economists would seem to be Paul Krugman;  here is a fairly random sample of him failing to anticipate the current crisis (you can go back much further with him on the dangers --- and let's not forget, the existence --- of the housing bubble).  As for regression to childhood, there seems to be a more serious epidemic among some (but far from all!) politically conservative economists, of regression to being macroeconomically unborn.  What's Ferguson's argument here: If they teach it in Econ 1 in every halfway respectable university in the country, there can't be anything to it?