To see Dandoff invoking Koo, a true blue Keynesian, to come to his rescue it is strange, but legitimate. And because it is legitimate let's see if I can help in sheding some light upon the subject.
Contrary to people's believes, for an economy to enter into a liquidity trap interest rates do not need to fall to zero. All that is required is for them to fall to a point where investors believe that they cannot fall any further. At such point according to Keynes monetary policy ceases to be effective, causing an economy to stay for a long period of time in equilibrium at bellow full employment. According to Keynes too, for an economy to quickly recover from such stage only deficit spending becomes an effective mechanism.
Based upon Irving Fisher's work and the Japanese case Koo advanced the proposition that it is possible for an economy to stay in equilibrium at belllow full unemployment even without deflation. And that when that happens, like Keynes said, there is nothing that the monetary authorities can do.
Flor other Keynesians like, for instance, Krugman UNCONVENTIONAL monetary policy MAY help if it can induce a game changer in people's expectations about future monetary policy or, if that becomes a bridge too far for the monetary policy authorities to cross then it may be able to produce a marginal effect because among the whole population there must be people that are not debt constrained and therefore people in position to be induced to borrow in order to invest or spend. In addition, if unconventional policy does not work there is nothing to loose as it does not harm the chances of recovery. This is, of course, in the context of a relatively close economy because under a regime of floating exchange rates an open economy can benefit from a devaluation of its currency, which the implementation of unconventional monetary policy can induce, this, of course, provided that retaliatory measures by its partners are not introduce. This last aspect clearly shows that in a world where everybody is facing a lack of aggregate demand the only way is deficit spending and not the disastrous return to beggar-thy -neyghbour policies. This is one of the reasons why is hard to see QE4 to be in the cards.
I also must mention here that it is known that one of the problems confronting the poor is that they have no access to credit and therefore no access to the principal mechanism available for the leveraging of one's wealth in orther to accumulate more. Therefore, any credit expansion will always in principle help directly the ones in position to borrow and only indirectly those without the capacity to do so and only by providing them with jobs.
Anyway, lets see what Krugman has to say about this and about inequality with the hilighting in bold provided by yours truly.
Not Invented Here Macroeconomics.
Martin Wolf writes sympathetically about Richard Koo’s latest; let me be a bit less sympathetic.
As Wolf notes, Koo had a big and important idea: he realized that Irving Fisher’s notion of debt deflation can explain persistent economic weakness even without literal deflation. As long as some part of the private sector has, for whatever reason, taken on levels of debt that now look excessive, the efforts of debtors to pay off their debts can act as a persistent drag on aggregate demand — one that is hard to counter with monetary policy, because many players in the economy can’t or won’t spend more no matter how cheap money becomes. Koo argues further that deficit spending can play a useful role in a balance sheet recession, not just by providing a temporary boost, but by providing a favorable environment for debtors to deleverage, setting the stage for durable recovery.
This is a very useful insight, and one that many of us have taken on board, fully acknowledging Koo’s contribution.
But Koo hasn’t just argued for the usefulness of fiscal stimulus in balance-sheet recessions; he has engaged in a relentless jihad against any attempt to use monetary policy, either as a supplement to fiscal policy or as the best you can do if fiscal policy is paralyzed by politics. And it’s very hard to see why.
Let’s be clear: antipathy to monetary policy does not, in any way, emerge naturally from a balance-sheet approach. Yes, it’s going to be hard for the central bank to gain traction, because excessively indebted firms or households can’t spend even if borrowing is cheap; but there have to be some players who aren’t excessively indebted — if there are debtors, there must be creditors — so there should be some margin on which monetary policy can act. Anyway, at worst monetary expansion will be irrelevant. And to the extent that central banks can raise inflation and/or fight deflation, this is an especially valuable thing if you’re in a balance-sheet slump — which was Fisher’s original point.
I’m not making these arguments casually: I’ve worked fairly hard to understand the implications of balance-sheet models, and they always come up supportive of QE and other forms of unconventional monetary policy.
So whence comes Koo’s bitter antipathy? Frankly, I can’t see any explanation other than not-invented-here syndrome; Koo’s original analysis — which we all admire, and for which we all give him credit — made the case for a fiscal solution, and he not only rejects any alternative but insists that it would be a terrible thing for reasons unclear. And it’s really too bad, because he’s hurting his own credibility.
Twin Peaks Planet.
In 2014, soaring inequality in advanced nations finally received the attention it deserved, as Thomas Piketty’s “Capital in the Twenty-First Century” became a surprise (and deserving) best seller. The usual suspects are still in well-paid denial, but, to everyone else, it is now obvious that income and wealth are more concentrated at the very top than they have been since the Gilded Age — and the trend shows no sign of letting up.
But that’s a story about developments within nations, and, therefore, incomplete. You really want to supplement Piketty-style analysis with a global view, and when you do, I’d argue, you get a better sense of the good, the bad and the potentially very ugly of the world we live in.
So let me suggest that you look at a remarkable chart of income gains around the world produced by Branko Milanovic of the City University of New York Graduate Center (which I will be joining this summer). What Mr. Milanovic shows is that income growth since the fall of the Berlin Wall has been a “twin peaks” story. Incomes have, of course, soared at the top, as the world’s elite becomes ever richer. But there have also been huge gains for what we might call the global middle — largely consisting of the rising middle classes of China and India.
And let’s be clear: Income growth in emerging nations has produced huge gains in human welfare, lifting hundreds of millions of people out of desperate poverty and giving them a chance for a better life. [ a fact that goldbugs aplaude due to this classs purchases of gold]
Now for the bad news: Between these twin peaks — the ever-richer global elite and the rising Chinese middle class — lies what we might call the valley of despond: Incomes have grown slowly, if at all, for people around the 20th percentile of the world income distribution. Who are these people? Basically, the advanced-country working classes. And although Mr. Milanovic’s data only go up through 2008, we can be sure that this group has done even worse since then, wracked by the effects of high unemployment, stagnating wages, and austerity policies.
Furthermore, the travails of workers in rich countries are, in important ways, the flip side of the gains above and below them. Competition from emerging-economy exports has surely been a factor depressing wages in wealthier nations, although probably not the dominant force. More important, soaring incomes at the top were achieved, in large part, by squeezing those below: by cutting wages, slashing benefits, crushing unions, and diverting a rising share of national resources to financial wheeling and dealing.
Perhaps more important still, the wealthy exert a vastly disproportionate effect on policy. And elite priorities — obsessive concern with budget deficits, with the supposed need to slash social programs — have done a lot to deepen the valley of despond. [ who here has not heard about the babies, the debt and deficits, the unfundedv liabilities, etc, etc]
So who speaks for those left behind in this twin-peaked world? You might have expected conventional parties of the left to take a populist stance on behalf of their domestic working classes. But mostly what you get instead — from leaders ranging from François Hollande of France to Ed Milliband of Britain to, yes, President Obama — is awkward mumbling. (Mr. Obama has, in fact, done a lot to help working Americans, but he’s remarkably bad at making his own case.)
The problem with these conventional leaders, I’d argue, is that they’re afraid to challenge elite priorities, in particular the obsession with budget deficits, for fear of being considered irresponsible. And that leaves the field open for unconventional leaders — some of them seriously scary — who are willing to address the anger and despair of ordinary citizens.
The Greek leftists who may well come to power there later this month are arguably the least scary of the bunch, although their demands for debt relief and an end to austerity may provoke a tense standoff with Brussels. Elsewhere, however, we see the rise of nationalist, anti-immigrant parties like France’s National Front and the U.K. Independence Party, or UKIP, in Britain — and there are even worse people waiting in the wings.
All of this suggests some uncomfortable historical analogies. Remember, this is the second time we’ve had a global financial crisis followed by a prolonged worldwide slump. Then, as now, any effective response to the crisis was blocked by elite demands for balanced budgets and stable currencies. And the eventual result was to deliver power into the hands of people who were, shall we say, not very nice.
I’m not suggesting that we’re on the verge of fully replaying the 1930s. But I would argue that political and opinion leaders need to face up to the reality that our current global setup isn’t working for everyone. It’s great for the elite and has done a lot of good for emerging nations, but that valley of despond is very real. And bad things will happen if we don’t do something about it.
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