In this New York Times commentary, Paul Krugman leads what will soon be a veritable gaggle of economists in lamenting the coming lost decade, one that could have been avoided if the government and central bank had only borrowed and printed more money.
For the past few months, much commentary on the economy — some of it posing as reporting — has had one central theme: policy makers are doing too much. Governments need to stop spending, we’re told. Greece is held up as a cautionary tale, and every uptick in the interest rate on U.S. government bonds is treated as an indication that markets are turning on America over its deficits. Meanwhile, there are continual warnings that inflation is just around the corner, and that the Fed needs to pull back from its efforts to support the economy and get started on its “exit strategy,” tightening credit by selling off assets and raising interest rates.
But the truth is that policy makers aren’t doing too much; they’re doing too little. Recent data don’t suggest that America is heading for a Greece-style collapse of investor confidence. Instead, they suggest that we may be heading for a Japan-style lost decade, trapped in a prolonged era of high unemployment and slow growth.
It’s not that nobody understands the risk. I strongly suspect that some officials at the Fed see the Japan parallels all too clearly and wish they could do more to support the economy. But in practice it’s all they can do to contain the tightening impulses of their colleagues, who (like central bankers in the 1930s) remain desperately afraid of inflation despite the absence of any evidence of rising prices. I also suspect that Obama administration economists would very much like to see another stimulus plan. But they know that such a plan would have no chance of getting through a Congress that has been spooked by the deficit hawks.
It really is a brilliant approach to defending Keynesian economics – if the stimulus doesn’t work, call for an even bigger one, and, if that doesn’t work, repeat the process until you get the desired result, regardless of whether the desired result is even achievable.
The idea that there may be fundamental flaws in what passes for contemporary economic thought (e.g., the unhealthy focus on consumer prices to the exclusion of nearly everything else as an indications of when to stop stimulating and the misplaced thinking that it’s never a solvency problem, only a liquidity problem) gets nary a consideration and today’s “cream of the crop” economists just shake their head at how policymakers are screwing it up again.