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.

Photo: Getty
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Are the Conservatives getting ready to learn to love the EEA?

You can see the shape of the deal that the right would accept. 

In an early morning address aimed half reassuring the markets and half at salvaging his own legacy, George Osborne set out the government’s stall.

The difficulty was that the two halves were hard to reconcile. Talk of “fixing the roof” and getting Britain’s finances in control, an established part of Treasury setpieces under Osborne, are usually merely wrong. With the prospect of further downgrades in Britain’s credit rating and thus its ability to borrow cheaply, the £1.6 trillion that Britain still owes and the country’s deficit in day-to-day spending, they acquired a fresh layer of black humour. It made for uneasy listening.

But more importantly, it offered further signs of what post-Brexit deal the Conservatives will attempt to strike. Boris Johnson, the frontrunner for the Conservative leadership, set out the deal he wants in his Telegraph column: British access to the single market, free movement of British workers within the European Union but border control for workers from the EU within Britain.

There is no chance of that deal – in fact, reading Johnson’s Telegraph column called to mind the exasperated response that Arsene Wenger, manager of Arsenal and a supporter of a Remain vote, gave upon hearing that one of his players wanted to move to Real Madrid: “It's like you wanting to marry Miss World and she doesn't want you, what can I do about it? I can try to help you, but if she does not want to marry you what can I do?”

But Osborne, who has yet to rule out a bid for the top job and confirmed his intention to serve in the post-Cameron government, hinted at the deal that seems most likely – or, at least, the most optimistic: one that keeps Britain in the single market and therefore protects Britain’s financial services and manufacturing sectors.

For the Conservatives, you can see how such a deal might not prove electorally disastrous – it would allow them to maintain the idea with its own voters that they had voted for greater “sovereignty” while maintaining their easy continental holidays, au pairs and access to the Erasmus scheme.  They might be able to secure a few votes from relieved supporters of Remain who backed the Liberal Democrats or Labour at the last election – but, in any case, you can see how a deal of that kind would be sellable to their coalition of the vote. For Johnson, further disillusionment and anger among the voters of Sunderland, Hull and so on are a price that a Tory government can happily pay – and indeed, has, during both of the Conservatives’ recent long stays in government from 1951 to 1964 and from 1979 to 1997.

It feels unlikely that it will be a price that those Labour voters who backed a Leave vote – or the ethnic and social minorities that may take the blame – can happily pay.  

Stephen Bush is special correspondent at the New Statesman. He usually writes about politics.