The Timidity Trap
There
don’t seem to be any major economic crises underway right this moment,
and policy makers in many places are patting themselves on the back. In
Europe, for example, they’re crowing about Spain’s recovery: the country seems set to grow at least twice as fast this year as previously forecast.
Unfortunately, that means growth of 1 percent, versus 0.5 percent, in a deeply depressed economy with 55 percent youth unemployment.
The fact that this can be considered good news just goes to show how
accustomed we’ve grown to terrible economic conditions. We’re doing
worse than anyone could have imagined a few years ago, yet people seem
increasingly to be accepting this miserable situation as the new normal.
How
did this happen? There were multiple reasons, of course. But I’ve been
thinking about this question a lot lately, in part because I’ve been
asked to discuss a new assessment of Japan’s efforts to break out of its deflation trap.
And I’d argue that an important source of failure was what I’ve taken
to calling the timidity trap — the consistent tendency of policy makers
who have the right ideas in principle to go for half-measures in
practice, and the way this timidity ends up backfiring, politically and
even economically.
In other words, Yeats had it right: the best lack all conviction, while the worst are full of passionate intensity.
About
the worst: If you’ve been following economic debates these past few
years, you know that both America and Europe have powerful pain caucuses
— influential groups fiercely opposed to any policy that might put the
unemployed back to work. There are some important differences between
the U.S. and European pain caucuses, but both now have truly impressive
track records of being always wrong, never in doubt.
Thus,
in America, we have a faction both on Wall Street and in Congress that
has spent five years and more issuing lurid warnings about runaway
inflation and soaring interest rates. You might think that the failure
of any of these dire predictions to come true would inspire some second
thoughts, but, after all these years, the same people are still being
invited to testify, and are still saying the same things.
Meanwhile, in Europe, four years have passed since the Continent turned to harsh austerity programs.
The architects of these programs told us not to worry about adverse
impacts on jobs and growth — the economic effects would be positive,
because austerity would inspire confidence. Needless to say, the
confidence fairy never appeared, and the economic and social price has
been immense. But no matter: all the serious people say that the
beatings must continue until morale improves.
So what has been the response of the good guys?
For
there are good guys out there, people who haven’t bought into the
notion that nothing can or should be done about mass unemployment. The
Obama administration’s heart — or, at any rate, its economic model — is
in the right place. The Federal Reserve has pushed back against the
springtime-for-Weimar, inflation-is-coming crowd. The International
Monetary Fund has put out research debunking claims that austerity is painless. But these good guys never seem The
classic example is the Obama stimulus, which was obviously underpowered
given the economy’s dire straits. That’s not 20/20 hindsight. Some of
us warned right from the beginning
that the plan would be inadequate — and that because it was being
oversold, the persistence of high unemployment would end up discrediting
the whole idea of stimulus in the public mind. And so it proved.
What’s not as well known is that the Fed has, in its own way, done the same thing. From the start, monetary officials ruled out
the kinds of monetary policies most likely to work — in particular,
anything that might signal a willingness to tolerate somewhat higher
inflation, at least temporarily. As a result, the policies they have
followed have fallen short of hopes, and ended up leaving the impression
that nothing much can be done.
And
the same may be true even in Japan — the case that motivated this
article. Japan has made a radical break with past policies, finally
adopting the kind of aggressive monetary stimulus Western economists have been urging for 15 years and more.
Yet there’s still a diffidence about the whole business, a tendency to
set things like inflation targets lower than the situation really
demands. And this increases the risk that Japan will fail to achieve
“liftoff” — that the boost it gets from the new policies won’t be enough
to really break free from deflation.
You
might ask why the good guys have been so timid, the bad guys so
self-confident. I suspect that the answer has a lot to do with class
interests. But that will have to be a subject for another column.
