Paul Krugman: Japan’s Economy, Crippled by Caution

Ending deflation is easy. But convincing people to support the policy that is needed is almost impossible:

Japan’s Economy, Crippled by Caution, by Paul Krugman, Commentary, NY Times: Visitors to Japan are often surprised by how prosperous it seems. It doesn’t look like a deeply depressed economy. And that’s because it isn’t. ...

Yet Japan is still caught in an economic trap. Persistent deflation... So Japan needs to make a decisive break with its deflationary past. You might think ... ending deflation is easy. Can’t you just print money? But ... central banks like the Federal Reserve or the Bank of Japan ... generally use it to buy government debt. In normal times ... sellers of that government debt don’t want to sit on idle cash, so they lend it out, stimulating spending... And as the economy heats up, wages and prices should eventually start to rise, solving the problem of deflation.

These days, however, interest rates are very low in most major economies, reflecting the weakness of investment demand. What this means is that there’s no real penalty for sitting on cash, and that’s what people and institutions do. ...

How, then, can policy fight deflation?

Well, the answer currently being tried in much of the world is so-called quantitative easing. ... But is this sufficient? Doubtful. ...

What’s remarkable about this record of dubious achievement is that there actually is a surefire way to fight deflation: When you print money, don’t use it to buy assets; use it to buy stuff. That is, run budget deficits paid for with the printing press. ...

But nobody is doing the obvious thing. Instead, all around the advanced world governments are engaged in fiscal austerity, dragging their economies down...

Why? Part of the answer is that demands for austerity serve a political agenda, with panic over the alleged risks of deficits providing an excuse for cuts in social spending. But the biggest reason it’s so hard to fight deflation, I contend, is the curse of conventionality.

After all, printing money to pay for stuff sounds irresponsible, because in normal times it is. And no matter how many times some of us try to explain that these are not normal times, that in a depressed, deflationary economy conventional fiscal prudence is dangerous folly, very few policy makers are willing to stick their necks out and break with convention.

The result is that seven years after the financial crisis, policy is still crippled by caution. Respectability is killing the world economy.