If you thought Geithner, Bernanke & Friends were out of touch with the basic principles of Econ 101 — i.e., Savings=Investment — you should listen to what some private economists are saying. Richard Koo, for instance. He is Nomura’s chief economist and therefore about as mainstream as they come. But to hear him speak his mind o
n how to end the recession is to despair of the possibility that private capital will have a significant role to play in whatever economy emerges from the ruins of the one now dying.
Koo evidently thinks the U.S. has something to learn from Japan’s death-like experience with deflation and prolonged recession. However, his advice to U.S. policymakers overlooks the fact that Japan itself has yet to escape the deflationary drag that has constrained the island nation’s economy for the last 20 years. Ignoring this depressing fact, Koo emphasizes instead that Japan managed via heroic fiscal stimulus to keep the country’s GDP from falling even as deflation destroyed wealth equivalent to three years’ GDP. Is it possible the economy did not flatline simply because insatiable U.S. consumers kept its export business humming? If so, it is an explanation that Koo chose not to explore.
Spend It Now!
Here’s a link to his speech, which runs about an hour. The topic, “America’s Balance Sheet Recession,” is supposed to conjure up something far worse than the usual inventory recession. It surely is; but we part company with Koo on how to resolve it. He says policymakers have not acted aggressively enough to overcome the lack of private borrowing. The solution? Get the government spending huge sums right away, says Koo. The idea is troubling enough, since Government is not likely to put a dime of that money into the kind of cutting edge companies and technologies that in fact hold the key to America’s economic future. But Koo boldly asserts that this hardly matters – that it is not what the government spends the money on, but how quickly and how much of it gets spent.
To believe that wasting money in this way, and the more promiscuously the better, will somehow put us on the right track beggars logic. Koo’s prescriptions are Keynesianism on steroids, but perhaps it would ultimately be beneficial to give them a try, since the epic failure likely to result would put Keynesian quackery to rest once and for all.
(If you’d like to have Rick’s Picks commentary delivered free each day to your e-mail box, click here.)
Mo, we speak of Keynesianism and flawed monetary policy and you sprout on about 2000 year-old-dogma. Dude, your thinking is Stone Age. What we are speaking of may ultimately take us to a more primitive time, but I can assure you that your thinking will NEVER gain traction – for that is a true definition of insanity…. go buy some government bonds, and remember to vote GOP.