As I’ve been noting recently, there’s a lot of opposition within Japan to the Bank of Japan’s policy of printing more money, and there’s also a lot of pressure on the government to raise taxes.And that’s not very different from what has been happening throughout the rest of the advanced world: Central banks that have pursued quantitative easing have done so despite political pressure, not because of it, and fiscal austerity has been imposed almost everywhere.
The funny thing is that when you ask for justifications for pursuing hard money and tight budgets in a depressed, low-inflation economy, the answers you get often start from the presumption that money printing and deficit finance are immensely tempting to politicians, so that you shouldn’t dare let them get even a slight taste of these addictive drugs.
This is often said in a tone of great wisdom, and presented as a lesson that history teaches us.
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Now, as the Oxford economist Simon Wren-Lewis pointed out on his blog recently – and as I’ve noted in the past – history actually teaches us no such thing. Fiscal stimulus in the United States, far from becoming permanent, has always faded out fast, indeed too fast, and monetary retrenchment has tended to arrive too quickly. Even when things did run away from us in the 1970s, it was not at all the story that conservatives now like to tell – a story in which central banks printed money to cover deficit spending. In fact, the deficits weren’t actually big and inflation took off because of oil shocks and macroeconomic misjudgments, not populist temptation.
But why don’t these things happen in advanced countries? After all, the idea – that populist politicians love it when people tell them that printing money and running big deficits is O.K. – seems plausible.
And things like that have happened in Latin America – indeed they are happening again today in Venezuela and Argentina. So why don’t they ever happen in the United States, Europe or Japan? Why, in a time of deflationary pressure, have calls for belt-tightening dominated the political scene?
I actually don’t know, although it is a puzzle worth pondering.
Justin Fox at Harvard Business Review recently noted in an article that the world is still not flat, and in fact doesn’t seem to be getting flatter; global “connectedness,” by various measures, seems to have leveled off. In particular, “North-to-North” trade doesn’t seem to be going anywhere.
I’ve tried to make a similar point. As I see it, “hyperglobalization” – the big increase in trade relative to gross domestic product in the two decades after 1990 – was a one-off affair driven by trade liberalization in developing countries and the rise of containerization, which led to a breakup of the value chain, with labor-intensive segments of production moving to China and other emerging economies. There wasn’t any comparable boom in trade or abolition of distance between economies at similar wage levels. If anything, interregional trade and specialization within the United States may have declined.
The flattening out of flattening is neither good nor bad; it’s just what happens when a particular trend reaches its limit.
What is important to realize, however, is that trends tend to do that.