Krugman: Can Japan pull it off?

Can Japan actually end decades of deflation?

Paul Krugman examines former Bank of England Monetary Policy Committee member Adam Posen's attempts to square the circle between his support for expansionary fiscal stimulus in Britain — where it hasn't happened — and opposition to the same in Japan — where it is apparently about to begin.

Posen wrote, in the Financial Times, that:

Mr Abe’s new fiscal stimulus initiative is therefore questionable. Not because another 2 per cent of GDP will be the proverbial tipping point on Japanese debt sustainability, for the factors protecting Japan from overt fiscal crisis remain. Nor because it will be ineffective; if anything, when combined with monetary expansion and a likely consumption tax rise in the near future, I expect its multiplier and thus short-run impact to be high.

The additional stimulus in Japan is counterproductive because it adds to the long-term costs without addressing Japan’s real problem: a return to deflation and an overvalued exchange rate.

Krugman is "a bit puzzled". He agrees that deflation is Japan's problem, because deflation forces short-term interest rates to bump against the lower bound. Since interest rates can't go below zero, that is, they are forced to remain slightly positive. That means that real interest rates — the nominal interest rate plus inflation — are forced to be significantly higher under deflation than they would be with mildly positive inflation, reducing the effectiveness of monetary policy.

So far, so macroeconomics 101. Where Krugman disagrees with Posen is how to break out of the deflation trap. Posen argues that unconventional monetary policy — quantitative easing and the like — can be enough. It's a monetary problem, so it ought to have monetary solutions. But Krugman argues that there may be a better way:

The credibility of a higher inflation target in the face of the deflationary bias of central bankers may well be best established by (a) reducing the central bank’s autonomy and (b) getting the central bank in the business of supporting — indeed, monetizing — government deficits, at least for a while. Gauti Eggertsson made this point long ago (pdf), pointing to Japan’s successful polices in the first half of the 30s as a clear example. Indeed, Gauti argued that having a large government debt can be a real advantage in such circumstances: efforts to raise expected inflation gain extra credibility if the government would clearly benefit in fiscal terms, and the central bank is sufficiently subordinated to elected officials that investors believe that it will take these fiscal benefits into account.

In other words, it all comes back to the question of central bank independence. If the government destroys that independence (even if it does it for paleo-conservative, nationalistic, reasons), and engineers a situation where inflation would make it better-off, then inflation expectations can be raised far higher than an independent central bank could ever do alone. Especially one which has so consistently failed to reverse the trend as the national bank of Japan.

Visiting Japanese Prime Minister Shinzo Abe speaks during a joint press conference held after official talks with his Vietnamese counterpart. Photograph: Getty Images

Alex Hern is a technology reporter for the Guardian. He was formerly staff writer at the New Statesman. You should follow Alex on Twitter.

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How Donald Trump is slouching towards the Republican nomination

There was supposed to be a ceiling above which Trump’s popular support could not climb.

In America, you can judge a crowd by its merchandise. Outside the Connecticut Convention Centre in Hartford, frail old men and brawny moms are selling “your Trump 45 football jerseys”, “your hats”, “your campaign buttons”. But the hottest item is a T-shirt bearing the slogan “Hillary sucks . . . but not like Monica!” and, on the back: “Trump that bitch!” Inside, beyond the checkpoint manned by the Transportation Security Administration and the secret service (“Good!” the man next to me says, when he sees the agents), is a family whose three kids, two of them girls, are wearing the Monica shirt.

Other people are content with the shirts they arrived in (“Waterboarding – baptising terrorists with freedom” and “If you don’t BLEED red, white and blue, take your bitch ass home!”). There are 80 chairs penned off for the elderly but everyone else is standing: guys in motorcycle and military gear, their arms folded; aspiring deal-makers, suited, on cellphones; giggling high-school fatsos, dressed fresh from the couch, grabbing M&M’s and Doritos from the movie-theatre-style concession stands. So many baseball hats; deep, bellicose chants of “Build the wall!” and “USA!”. (And, to the same rhythm, “Don-ald J!”)

A grizzled man in camouflage pants and combat boots, whose T-shirt – “Connecticut Militia III%” – confirms him as a member of the “patriot” movement, is talking to a zealous young girl in a short skirt, who came in dancing to “Uptown Girl”.

“Yeah, we were there for Operation American Spring,” he says. “Louis Farrakhan’s rally of hate . . .”

“And you’re a veteran?” she asks. “Thank you so much!”

Three hours will pass. A retired US marine will take the rostrum to growl, “God bless America – hoo-rah!”; “Uptown Girl” will play many more times (much like his speeches, Donald J’s playlist consists of a few items, repeated endlessly), before Trump finally looms in and asks the crowd: “Is this the greatest place on Earth?”

There was supposed to be a ceiling above which Trump’s popular support could not climb. Only a minority within a minority of Americans, it was assumed, could possibly be stupid enough to think a Trump presidency was a good idea. He won New Hampshire and South Carolina with over 30 per cent of the Republican vote, then took almost 46 per cent in Nevada. When he cleaned up on Super Tuesday in March, he was just shy of 50 per cent in Massachusetts; a week later, he took 47 per cent of the votes in Mississippi.

His rivals, who are useless individually, were meant to co-operate with each other and the national party to deny him the nomination. But Trump won four out of the five key states being contested on “Super-Duper Tuesday” on 15 March. Then, as talk turned to persuading and co-opting his delegates behind the scenes, Trump won New York with 60 per cent.

Now, the campaign is trying to present Trump as more “presidential”. According to his new manager, Paul Manafort, this requires him to appear in “more formal settings” – without, of course, diluting “the unique magic of Trump”. But whether or not he can resist denouncing the GOP and the “corrupt” primary system, and alluding to violence if he is baulked at at the convention, the new Trump will be much the same as the old.

Back in Hartford: “The Republicans wanna play cute with us, right? If I don’t make it, you’re gonna have millions of people that don’t vote for a Republican. They’re not gonna vote at all,” says Trump. “Hopefully that’s all, OK? Hopefully that’s all, but they’re very, very angry.”

This anger, which can supposedly be turned on anyone who gets in the way, has mainly been vented, so far, on the protesters who disrupt Trump’s rallies. “We’re not gonna be the dummies that lose all of our jobs now. We’re gonna be the smart ones. Oh, do you have one over there? There’s one of the dummies . . .”

There is a frenzied fluttering of Trump placards, off to his right. “Get ’em out! . . . Don’t hurt ’em – see how nice I am? . . . They really impede freedom of speech and it’s a disgrace. But the good news is, folks, it won’t be long. We’re just not taking it and it won’t be long.”

It is their removal by police, at Trump’s ostentatious behest, that causes the disruption, rather than the scarcely audible protesters. He seems to realise this, suddenly: “We should just let ’em . . . I’ll talk right over them, there’s no problem!” But it’s impossible to leave the protesters where they are, because it would not be safe. His crowd is too vicious.

Exit Trump, after exactly half an hour, inclusive of the many interruptions. His people seem uplifted but, out on the street, they are ambushed by a large counter-demonstration, with a booming drum and warlike banners and standards (“Black Lives Matter”; an image of the Virgin of Guadalupe, holding aloft Trump’s severed head). Here is the rest of the world, the real American world: young people, beautiful people, more female than male, every shade of skin colour. “F*** Donald Trump!” they chant.

After a horrified split-second, the Trump crowd, massively more numerous, rallies with “USA!” and – perplexingly, since one of the main themes of the speech it has just heard was the lack of jobs in Connecticut – “Get a job!” The two sides then mingle, unobstructed by police. Slanging matches break out that seem in every instance to humiliate the Trump supporter. “Go to college!” one demands. “Man, I am in college, I’m doin’ lovely!”

There is no violence, only this: some black boys are dancing, with liquid moves, to the sound of the drum. Four young Trump guys counter by stripping to their waists and jouncing around madly, their skin greenish-yellow under the street lights, screaming about the building of the wall. There was no alcohol inside; they’re drunk on whatever it is – the elixir of fascism, the unique magic of Trump. It’s a hyper but not at all happy drunk.

As with every other moment of the Trump campaign so far, it would have been merely some grade of the cringeworthy – the embarrassing, the revolting, the pitiful – were Trump not slouching closer and closer, with each of these moments, to his nomination. 

This article first appeared in the 28 April 2016 issue of the New Statesman, The new fascism