What if Abenomics works?
For three years, economic policy throughout the advanced world has been paralysed, despite high unemployment, by a dismal orthodoxy.
Every suggestion of action to create jobs has been shot down with warnings of dire consequences. If we spend more, the Very Serious People say, the bond markets will punish us. If we print more money, inflation will soar. Nothing should be done because nothing can be done, except ever harsher austerity, which will someday, somehow, be rewarded.
But now it seems that one major nation is breaking ranks — and that nation is, of all places, Japan.
Mr Shinzo Abe, the new Prime Minister, returned to office pledging to end Japan’s long economic stagnation, and he has already taken steps orthodoxy says we must not take. And the early indications are that it is going pretty well.
Some background: Long before the 2008 financial crisis plunged America and Europe into a deep and prolonged economic slump, Japan held a dress rehearsal in the economics of stagnation. When a burst stock and real estate bubble pushed Japan into recession, the policy response was too little, too late and too inconsistent.
To be sure, there was a lot of spending on public works, but the government, worried about debt, always pulled back before a solid recovery could get established. By the late ’90s, persistent deflation was already entrenched.
In the early 2000s, the Bank of Japan tried to fight deflation by printing a lot of money. But it, too, pulled back at the first hint of improvement, and the deflation never went away.
There is another lesson in Japan’s experience: While getting out of a prolonged slump turns out to be very difficult, that is mainly because it is hard getting policymakers to accept the need for bold action.
That is, the problem is mainly political and intellectual, rather than strictly economic.