Krugman's uncanny accuracy shows why more eyes should be on Japan

Abenomics is more that just a Japanese story.

Noah Smith has a post up examining Paul Krugman's remarkable record of accurate economic predictions. Ask "KrugTron the Invincible", as Smith dubs him, and he will point to his use of Keynesian economics for simple rule-of-thumb guesstimates, which then get cleaned up with his understanding of the problems of a liquidity trap. But Smith wonders if there's a more specific reason for Krugman's hit-rate:

Like Voltron before him, he's borrowing heavily from Japan.

See, I myself am fairly agnostic about Keynesian ideas. But I've expected nothing but low growth, low interest rates, and low inflation since 2008 (though I haven't been as confident about these things as Krugman, and am thus not in his class as a super-robot). I expected these things because of one simple proposition: We are like Japan.

Since its land bubble popped in 1990, Japan has had low inflation and low interest rates and low growth, even as government debt mounted and quantitative easing was tried. Paul Krugman was there. He watched Japan carefully, and he often states that it deeply affected his thinking. In fact, it might not be an exaggeration to say that watching Japan made Krugman the Keynesian he is today.

The comparison is, at the moment, more relevant to the US than the UK. Our problems are pretty clear: we slashed investment coming out of a recession, which put the brakes on recovery. Now that we're (slowly) putting our foot back on the accelerator, we can expect a return to growth – at least until deficit reduction becomes a priority again. Insofar as we have any macroeconomic phenomena confounding economists, it's positive news: our unemployment rate is significantly lower than it should be, given our anaemic recovery. That's been pegged on underemployment, productivity declines, and the government fiddling the figures, but it doesn't call for a wholesale reworking of economic theory.

The Japanese experience, however, does. Its "lost decade" – now well on the way to being twenty years long – has stubbornly resisted everything thrown at it so far. The pessimistic view is that it's just what happens when demographics turn sour: with an ageing society and migration too low to counteract it, the economy is retooling to serve the needs of retirees, for whom long-term growth isn't a priority.

But Abenomics, the name for the broad package of unconventional policy measures brought in by the government of Shinzo Abe, offers a ray of hope. And if any of those tools, which range from monetized nationalisation of industrial stock to explicitly targeting the stock market to performing one of the largest rounds of qualitative easing ever, work, then there's a meaningful plan of action for not just Japan, but the US as well.

If they don't, then hopefully it won't take America the same twenty years it's taken Japan to realise that business as usual just won't cut it.

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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What did Jeremy Corbyn really say about Bin Laden?

He's been critiqued for calling Bin Laden's death a "tragedy". But what did Jeremy Corbyn really say?

Jeremy Corbyn is under fire for describing Bin Laden’s death as a “tragedy” in the Sun, but what did the Labour leadership frontrunner really say?

In remarks made to Press TV, the state-backed Iranian broadcaster, the Islington North MP said:

“This was an assassination attempt, and is yet another tragedy, upon a tragedy, upon a tragedy. The World Trade Center was a tragedy, the attack on Afghanistan was a tragedy, the war in Iraq was a tragedy. Tens of thousands of people have died.”

He also added that it was his preference that Osama Bin Laden be put on trial, a view shared by, among other people, Barack Obama and Boris Johnson.

Although Andy Burnham, one of Corbyn’s rivals for the leadership, will later today claim that “there is everything to play for” in the contest, with “tens of thousands still to vote”, the row is unlikely to harm Corbyn’s chances of becoming Labour leader. 

Stephen Bush is editor of the Staggers, the New Statesman’s political blog.