Krugman has been on a roll dealing with the notion that austerity needs to be introduced now, now, now in order to Appear Serious. Lately, he’s been looking, along with Mark Thoma, Yglesias, Brad Delong among others, as to what are the potential motivations behind this push.
My 2 cents: I wonder if part of the motivating factor for beltway insiders and talking heads, if not academia, is that they vaguely remember the Federal Reserve “getting tough” in the early 1980s, introducing pain, and then the problems went away. And nowadays “structural reform” is in the air, Paul Volcker is back in the headlines, and it’s like it’s 1982 all over again.
Except of course everything is different. I might just go ahead and live-blog Richard Koo’s book, The Holy Grail of Macroeconomics: Lessons From Japan’s Great Recession, but here’s a chart:
Given that our short-term interest rates are 0%, 10 year treasuries are at 3.25%, and 30-year fixed around 4.75%, and we haven’t had huge strikes in forever, this doesn’t look like 1982. But I wonder if our talking heads understand that.
Here’s another cool chart from Japan, I want to look at the first line here:
Interest rates are at 0%, yet the corporate bond market is shrinking. Repeat that again: interest rates are at 0%, so debt is essentially free, yet corporations are choosing to net pay off debt.
If you went to the textbooks and case studies of every business school you wouldn’t find good answers for this. This means that corporations can’t find a good use of money. If the business has no profitable opportunities, it should close and return it’s money to businesses. It has no reason to exist, given that it’s reason for existing is that it knows what to do with shareholder’s money better than the shareholders, which in this case it does not.
That’s the normal economic world. But we aren’t in the normal world in these kinds of crashes. And we don’t appear to be in this world in the United States either (Fed Flow of Funds):
In Japan it was the nonfinancial corporate sector that had to “debt minimize” instead of “profit maximize” to repair its balance sheet. In the United States, the balance sheet recession is going to be played out by the household. And it’s going to take serious time to be repaired at 10% unemployment unless aggregate demand is put back into play.