Thursday, March 22, 2012


I'm in Japan, one great data point on the ineffectiveness of fiscal stimulus, and the reason for blog silence for the last week or so. I will be giving a talk about asset pricing, based on the "Discount Rates" paper, at a Chicago Booth  event on Friday evening March 23 at the American Club in Tokyo, details here. Blog readers and ex-students most welcome. It's a public event, but you have to register.  


  1. I just wrote a paper regarding the parallels between American fiscal policy of today and that of Japan since 1995.

    I use Japan to warn about the fact that "the US is entering a new economic paradigm that is little understood", much less thought at our universities' economic faculties.

    In case you are interested is called "The coming Triple Pronged Attack On The Nation", and can be found at

  2. Japan reveals the epic failure of fiscal stimulus, especially if asphyxiated by tight money. In fact, the whole economy has been asphyxiated by tight money.

    Since 1992, industrial output in Japan is down by 20 percent (btw, USA output doubled in he same time frame), and real wages are down by 15 percent. Property is down by 80 percent (and still falling), and equities down by 75 percent.

    The yen has soared. They had the "strong currency" everyone brays about.

    Tight money does not work--it leads to perm-deflationary recessions, ala Japan. That is the historical record.

    BTW, such right-wingers as Milton Friedman, Alan Meltzer, John Taylor, and Ben Bernanke all went to Japan and told them to print more money. See especially this

    Milton was very bullish on Japan printing more money aggressively until they saw robust growth and then some inflation. In 2006 John Taylor gushed about a QE program then undertaken by the Bank of Japan, but that they too soon abandoned.

    Remarkably, measured in yen, Japan's economy has not grown at all since 1992.

    The amnesia in the right-wing about what prominent right-wingers have recommended for Japan---that Bank of Japan print boatloads of money--- is astonishing.

    Now we have Cochrane in Japan, but only mentioning the folly of fiscal deficits.

    Cochrane, read up on your Milton!

    1. Ben I don't think you can say categorically that tight money policies are bad, it depends on the current times and what is going on in the nation and in international economics.

      Usually sound money is a good thing, but in an economic downturn, you are correct, more liquidity is needed.

      Japan may indeed have hurt itself by pursuing tight monetary policy, but not nearly as much as they hurt themselves by borrowing way more money than they can repay. And otherwise meddling in markets.

  3. kyle8-

    I am not a fan of deficit spending. I am a big fan of Market Monetarism. I heartily encourage you (and Cochrane) to join the Market Monetarism movement.

    I thought Cochrane's Japan observation was 1/2 the picture, and given the roll call of stalwart conservatives who went to Japan and told them to print a lot more money, Cochrane seemed to flying blind and falling back on right-wing shibboleths. Today's economic contraction calls for a bullish monetary policy and a roughly balanced federal budget. Lots of QE, probably, since we have hit zero bound.

    BTW, also Fredric Msihkin told Japan to print more money.

    Friedman, Meltzer, Taylor, Bernanke, Mishkin---Cochrane should get on board too.

    1. Ok so you don't like deficit spending, but you do like loose money !?!?! That is a distinction without a difference. If the central bank were expanding the money supply and using the phoney money to pay off treasury debt without incurring any new debt then that might be what you are aiming at, but none of it makes sense.

      At any rate you are replacing debt with more debt in smaller increments as the quality of the money declines.

  4. was 2 trillion not enough...?

  5. LAL-

    A policy is not enough until targets are hit. You can say, "But i pumped air into my tire for 30 seconds. More than ever! It has to be full."

    It is only full if it is full. How much you did does not matter.

    Same with QE and monetary policy. When we hit something like 12 straight quarters of 6-7 percent growth in nominal GDP, then maybe we can stop with QE. There should be a level or target, publicly announced, that the Fed hits.

    None of this should be simply construed as "printing money." Of course, taxes and regs have to be the minimal possible. I have little faith in federal social or military spending. State and local government are also sumps of anti-commercioalism, often under business banners (for example, no push-cart food vending, as is common in SE Asia). Licensing for everything, including lawyers. Really, we have to license lawyers? If you hire a bad lawyer, you die?

    Deleveraging through monetizing the debt, and resultant inflation (and balanced budgets) would do wonders for the USA economy. And that is what counts, prosperity--not slavish devotion to crank, voodoo or Theo-monetarist shibboleths.

    1. Benjamin,

      Bottom line: if I pump air into a flat tire without fixing the hole, I'm not doing anything but wasting air and time. How can I tell if I have a hole?...well if I keep putting air in and am getting no tire pressure, that is a pretty good sign...

      Also are you talking public debt here? or private debt?

  6. In rough, I am talking about the Fed and QE. Basically, I am advocating for the USA precisely what Milton Friedman advocated for Japan--the central bank buy government bonds, and keep buying until we see robust economic growth, and then after that, moderate inflation.

    Right now we have limp growth and record-low inflation (and perhaps deflation, if people like Don Boudreaux are correct, and the CPI overstates inflation).

    1. Out of curiosity do you think the fact that the US is a net importer and I believe was a net exporter would play a role?


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