The New Republic

Richard Koo may very well be right and that is a sobering thought.

- liberal reformer

October 22, 2010 at 11:54am

Finally, the liberals are catching up with reality. I have known this, and have written about it here, for well over a year. This is the reason why the knee-jerk liberal Keynesian strategy to increase aggregate demand is especially useless. HH paying off debt, increasing savings rate. Not surprisingly, Obaman was exactly wrong about the correct Gov intervention. What can you expect from a career public sector parasite who's not qualitified to run a large gas station. The non-liberal portion of the US knows this, and will vote for competence in Nov.

- mr_rationale

October 22, 2010 at 2:14pm

Wrong again, mr_ratturd! Richard Koo is prescribing a MASSIVE Keynesian stimulus to pull us out of this "balance-sheet recession"... which is what Japan eventually had to do. http://www.npr.org/templates/story/story.php?storyId=130458143 GUY RAZ, host: We're back with ALL THINGS CONSIDERED from NPR News. I'm Guy Raz. Almost two decades ago, Japan was hit by two potentially catastrophic events. The first was a crash in real estate values. The financial sector responded by hoarding cash and using it to pay down debts rather than spend it on new investments. It took Richard Koo and other Japanese economists a few years to figure out that this combination was driving Japan's economy into the ground. And so, they advised the Japanese government to start spending money and ignore growing deficits. And Koo argues that it worked. He wrote a book about it and is now trying to convince economic policymakers in this country that we're in the exact same spot. Mr. RICHARD KOO (Chief Economist, Nomura Research Institute): This disease is actually the same disease hit Japan 15 years earlier. RAZ: The same exact disease? Mr. KOO: Exactly the same disease. RAZ: It's like nobody knew what it was. Mr. KOO: Those of us in Japan were flabbergasted. The (unintelligible) raced down to zero, lots of quantitative (unintelligible), nothing helped. RAZ: And you can recognize it instantly here in the U.S. now? Mr. KOO: Yes, because the key feature of this disease is that people - meaning private sector is still leveraging or paying down debt under zero interest rate condition. RAZ: Instead of spending money making investments. Mr. KOO: Exactly. RAZ: And you didn't know why. Mr. KOO: Well, the reason actually, when you think about it, is quite simple. Those people bought assets with borrowed money during the bubble days. The asset price collapsed after the bubble, liabilities remain and people suddenly realized that their balance sheet's underwater. What do you do? You used the cash flow to pay down debt. RAZ: Mm-hmm. Mr. KOO: And that's the right thing to do for people in that circumstances. But when everybody does it all at the same time, we enter what we call fallacy of composition in that what is right for the individual taken together is bad for the group. RAZ: Many economists look to Japan's past two decades as a cautionary tale. But you actually see Japan as a success story, an example for the United States. How so? Mr. KOO: Those people don't realize what happened to asset values. Commercial real estate in Japan - Tokyo, Osaka... RAZ: Collapsed. Mr. KOO: ...all cities - fell 87 percent. RAZ: Eighty-seven percent, the value of a home in some cities fell 87 percent? Mr. KOO: Eighty-seven percent. What kind of economy do you think you have left in the United States if Manhattan prices are down 87, Washington down 87, San Francisco down 87? RAZ: There'd be nothing left. Mr. KOO: There'd be nothing left. We managed to keep our GDP from falling below the peak of the bubble for the entire 20-year period. Our employment rate never went beyond 5.5 percent because government came in and borrow the money that people were all saving. RAZ: Japan, at certain times, has (unintelligible) huge budget deficits, has a ballooning national debt, that's not a problem? Mr. KOO: It's a problem, but it's the best of the possible choices in that government budget deficit increased by something like 460 trillion yen. That means about 92 percent of Japan's GDP. RAZ: Wow. Mr. KOO: But what's missing in the debate is that this 460 trillion yen deficit saved the GDP at least 2,000 trillion. RAZ: Richard Koo, how long could the United States, though, run massive budget deficits? Mr. KOO: In this type of recession, the amount of money the government has to borrow and spend is exactly equal to the excess saving in the private sector. RAZ: So when the private sector is saving and not spending, the government has to come in and borrow the equivalent amount and spend it? Mr. KOO: If you want to keep the GDP from collapsing, yes. RAZ: That's Richard Koo. He's been an adviser to five Japanese prime ministers. He's the chief economist at the Nomura Research Institute and the author of "The Holy Grail of Macroeconomics: Lessons from Japan's Great Recession." Richard Koo, thank you so much. Mr. KOO: Thank you very much.

- zardoz67

October 22, 2010 at 2:29pm

i agree with zardoz67 and I like his spelling, but for Mr_Rationale to rearrange the furniture of his brain is a painful expenditure of mental energy. I ask Mr_Rationale to imagine a city block of ten houses that represent the economy, except nobody has any money but for the home of Rich Guy on the corner. Mr_Rationale thinks if we don't tax the Rich Guy and we make it easier for the other homes to start businesses, the economy will be take off because the Rich Guy will lend money to the peniless for business startups (or buy stock in their companies) and, perhaps, lend to the penniless consumers, who can then go out and buy. The rich get richer.

- Nusholtz

October 22, 2010 at 3:43pm

HH pay down debts much more quickly when all of the earners in the HH have jobs, which was the intent of the Keynesian stimulus; you obviously missed the tidbit Koo threw out about unemployment rate peaking at a mere 5.5%, which is about as low as American corporations prefer it to go because any lower and it starts turning into an employees market as employers have to compete for talented labor in the smaller, more specialized worker pools.
OTOH, your rat-brained idea is to give money to the rich so they can do what...buy down the unemployed guy's debt?...donate it to the unemployed?...I know, give their employees raises? that would work, assuming they own a private company and they don't give themselves a raise instead. Of course, if they're just making their million as a high-priced executive, tax breaks for them don't mean anything for the employees under them in that company; but they could afford to hire another pool girl, or some autoerotica models to was their cars, or take their buddies to the swankiest club with those not-hookers; talk about "stimulating" the economy.

- GSpinks

October 22, 2010 at 5:52pm

Rationale always "knows" all of the answers because he is the quintessential ideologue. That is how the hedgehogs of left and right operate. He has repeatedly made the asseveration that the recession that we endured (December 2007-June 2009, according to the NBER) was a balance-sheet recession. Now, very possibly it was one, but this is still a matter of debate among economists, and rationale is no economist, that is obvious by his pinched thinking and perhaps even worse writing. He is a dabbler, and we all know how a little knowledge can be a dangerous thing. Then combine that with ideology, and it can become combustible. And balance-sheet recession or no, a Keynesian stimulus is a necessity and this proposition has widespread support among professional economists. You would never know this from reading r. With his frequent uppity and disparaging references to Econ 101, r. attempts to paint the economics profession as taking one line, when there is quite a bit of disagreement on many matters. Now, there is quite a bit of unanimity or near-unanimity on matters like free trade and whether Keynesian stimuluses work, but there is broad disagreement, too. At one pole, Eugene Fama takes the position that markets are nigh-on perfect, even as Joseph Stiglitz has done pioneering work on asymmetries in the marketplace. All of this is of course way beyond r.'s comprehension. Finally, as ever, r. hits and runs out here. As I have written before, he reminds me of the playground bully who is simultaneously aggressive and fearful; the bully pops a kid and then flees. Just like r. He is afraid of the give-and-take. And yes, I am sure that r. is male.

- liberal reformer

October 23, 2010 at 2:41pm

Earth to liberals --- 1. the Obama Keynesian stimulus has failed. This is why liberals will be crushed in Nov 2. the Japan Keysian stimuli, attempted over 20 years, has also failed miserably. 20 years with essentially no growth. Open your eyes - take a look at whats happening in England and France. Not very Keynesan is it. Wake up. Tragic to go through life wrong about so many concepts. Keynesian macro-econ policy has been proven a fraud since the stagflation of Carter -- WHICH WAS SUPPOSED TO BE IMPOSSIBLE. The IS-LM curve is a joke. Very hard to communicate market-based concepts to a bunch of parasites who dwell in public sector, have little understanding of even basic econ concepts, and entire self-worth tied up in their liberalness.

- mr_rationale

October 23, 2010 at 5:34pm

http://www.npr.org/templates/story/story.php?storyId=130791197 Austerity: A Virtue That Could Have Us Paying Twice GUY RAZ, host: Raising the retirement age in France is just one of the ways governments across Europe are trying to deal with growing deficits. In Britain this past week, Prime Minister David Cameron's Conservatives announced the largest government spending cuts since World War II. And it seems that lately, everyone is talking about one word. (Soundbite of video "Breaking Down Austerity") Professor MARK BLYTH (International Political Economy, Brown University): Austerity. It's big in Europe. It's getting big here. RAZ: This is from a video clip posted by Mark Blyth. He's a political economist at Brown University. (Soundbite of video "Breaking Down Austerity") (Soundbite of music) Prof. BLYTH: This common sense of austerity, of reducing public debt all at once through slashing services, involves a question of equity: Who pays and who doesn't? Those who made this mess won't, while those who already paid for it through the bailouts will pay again through austerity. This is why austerity is not common sense. It's a nonsense and a dangerous one at that. RAZ: Over the past few weeks, we've been canvassing the views of different economists on this program, asking for their views on how to tackle our economic problems. And this week, Mark Blyth joins me from Brown University. Mark Blyth, welcome to the program. Prof. BLYTH: Nice to be here. RAZ: Now, as you know, many European governments are cutting spending. The word is austerity, right? This has sort of become kind of like the hot economic term now, and this is what many people seem to want their governments to do, to stop spending, to cut deficits. Would it be a good idea here in the U.S.? Prof. BLYTH: Well, actually, I doubt it for one reason, what we would call a fallacy of composition problem: What's true of the whole is not true of the parts or the sum of the parts. If every household decides not to spend, you have no spending. If every country tries to clean its balance sheet at once, then you end up basically reducing the economy overall. Now, the argument, for example as in the United Kingdom, which is leading the trend in austerity politics, is that we're in debt, and we have to worry about the credibility we have in financial markets. So preempting this, the British government decided to clear its balance sheet, basically, and that is reduce lots and lots of government spending. Now, if every other country is continuing to spend and continuing to grow, you can have growth-friendly consolidation, as it's called. If, on the other hand, everyone does this at once, it's just the same as every household not spending: You end up with a shrinkage of the overall economy for no net gain. RAZ: So why do you think so many governments are doing this if, as you argue, it's a bad idea? Prof. BLYTH: Because it has a wonderful ring of virtue about it: austerity, the pain after the party. We all went out and gave ourselves mortgages we couldn't afford; we're drowning in debt and consumption. So there is this ring of virtue to austerity, and it chides with common sense. RAZ: So what you're saying is that if government engages in austerity measures, the public who paid for the bailouts are going to pay for austerity as well. Prof. BLYTH: Absolutely. And this is why, as a foreigner who lived in the United States for a very long period of time, I actually have a great deal of sympathy with the Tea Party. And it goes like this: They understand that their mortgage didn't get a bailout, whereas some big bank's mortgage derivatives portfolio got a bailout, and they think that's unfair. It also means that that debt is accumulated and they're going to have to pay for this at some point. Well, isn't it then really unfair to double-tax these people by having an asymmetric distribution in terms of who pays for the debt? Because if you cut government services, it's exactly the people who consume Medicare, Medicaid, teachers' salaries. It's these things which will be hurt. RAZ: But many folks in the Tea Party are calling for austerity measures. Prof. BLYTH: I know. And that's, to me, one of the greatest puzzles at the moment. I find it very difficult to understand how that link is drawn. Now, the argument is we need to cut taxes. Well, okay, we need to cut taxes, stimulate the economy. That makes the deficit worse. Okay, so what we need to do is not raise taxes, the third rail of politics. Well, then, how do you expect to consolidate the deficit? There are many contradictions in these arguments, and they're born of a sense of frustration out of what I think is the intuitive understanding people have that something deeply unfair is going on. RAZ: So, as you know, we've had many economists on the program over the past few weeks and months, asking them, how can we tackle these twin problems of high unemployment, slow growth? Some have suggested stimulus. Some have suggested austerity. What do you say? What could the government do now? Prof. BLYTH: The austerity people will argue that we need to consolidate balance sheets and clean things up and reduce the debt. And after that, the private sector will recover. That's a very, very large bet. It is based upon the fact that if you get rid of public spending, private spending will take its place, a crowding out of private spending. If that was the case, interest rates should be much higher than they are. So what the government needs to do is to spend enough to maintain the rate of growth in gross domestic product so that things don't get any worse than they are now, allowing people who are in employment to pay back debt, to increase savings, to consolidate and clean up their balance sheets. Then private spending can continue. RAZ: That's Mark Blyth. He is a professor of international political economy at Brown University. He has an upcoming book. It's called "Austerity: The History of a Dangerous Idea." It'll be released next year. And you can see his video, "Breaking Down Austerity," at our website, npr.org. Mark Blyth, thank you so much. Prof. BLYTH: Thank you very much.

- zardoz67

October 25, 2010 at 5:09pm