Contrasting Alan Meltzer on Japan and the United States While He Lectures Occupy

I, for one, really like the new emphasis conservatives are putting on so-called “social issues” over economic issues. When Rick Santorum says that he is worried about Satan attacking America, I believe that he believes that.  His worry that Satan infested my brain with devils while I was at college uses reasons I can accept as legible under the ideal of public reason.  However, I have no idea what conservatives economists like Alan Meltzer really think about the economic recovery – do they think their arguments are the best policy or are they trying to go after unrelated objectives?

I bring up Alan Meltzer because he has a new book out called Why Capitalism?  The pitch last fall was that it was addressed to the Occupy movement:  “The tired, huddled crowd representing the “99%” in the Occupy Wall Street demonstration is unhappy with many effects of capitalism…In the midst of this crisis and extreme frustration with the economy, many may wonder: is capitalism the right economic system for us? In his new book WHY CAPITALISM? (Oxford | March 2012) Allen H. Meltzer affirms that it is.”

Here’s the thing – Occupy might have a lot of reasons to like Meltzer.  Many in the Occupy movement are worried about the weak economy. They are worried that, instead of focusing on getting the economy going again, elites are using the weak economy to argue for permanent tax cuts, tighter money, foreclosures, opportunistic disinflation and attacking social insurance, on the idea that the economy can’t get any better.

Occupy should check out this 1999 speech, A Policy for Japanese Recovery, from Meltzer (h/t Market Monetarist) on what to do for the weak economy in Japan (stuck in a similar situation to the United States today), as it addresses all that directly. I’m going to add some bolded numbers:

Repeatedly, the message has been to reduce tax rates permanently and maintain the exchange rate for the yen in its recent range…A permanent tax cut was supposed to do what previous fiscal efforts had failed to do — generate sustained expansion of the Japanese economy.

No one should doubt that Japanese expansion is desirable for Japan, its neighbors, and the rest of the world…The Japanese government has watched the economy stagnate much too long. [1] A policy change is long overdue.

The problem with the U.S. Treasury’s advice is that few would, and none should, believe
that Japan can reduce tax rates permanently. [2] Japan has run big budget deficits for the past five years and accumulated a large debt that must be serviced at considerably higher interest rates in the future. And Japan must soon start to finance large prospective deficits for old age pensions and health care. [3] There is no way to finance these current and future liabilities that will not involve higher future tax rates…

What is the alternative? Deregulation is desirable, but it will do its work slowly. [4] If temporary tax cuts are saved, not spent, and permanent tax cuts are impossible, Japan’s choice is between devaluation and renewed deflation. The deflationary solution runs grave risks…

Monetary expansion and devaluation is a much better solution. [5] An announcement by the Bank of Japan and the government that the aim of policy is to prevent deflation and restore growth by providing enough money to raise asset prices would change beliefs and anticipations…

[6] The volume of “bad loans” at Japanese banks is not a fixed sum. Rising asset prices would change some loans from bad to good, thereby improving the position of the banking system…

[7] Let money growth increase until asset prices start to rise.

I like targeting NGDP better than asset prices, but other than that pretty good, right?  And I’m sure these recommendations have continued forward to the United States today, right?

I think you see where this is going.

What’s his take on current US policy?  This single WSJ editorial on the US economy ends up recommending the exact opposite policies for the US compared to what he recommended for Japan.  Not only is it the opposite, but we can match the numbers listed above to the exact opposite recommendations listed below.  WSJ, August 2011, The Folly of Economic Short-Termism, my bolded numbering:

Advocates of more short-term stimulus make several fundamental mistakes. One is excessive attention to near-term data and neglect of the longer term. [1]

A large part of our current unemployment problem reflects the unsold stock of housing left from mistaken past housing policies…[6] But population growth, falling housing prices and rising rents will eventually help by stimulating enough new construction to put many in the housing industry back to work….

Our problems will not be solved by stop-gaps like QE3 [7] or lower labor taxes, but they are not intractable. What we need most is confidence in our future. That calls for:

• Reducing corporate tax rates permanently to encourage investment (paid for by closing loopholes). [2]

• Agreeing on long-term reductions in entitlement spending. [3]

• A five-year moratorium on new regulations affecting energy, environment, health and finance. [4]

• An explicit inflation target between zero and 2% to force the Fed to pay more attention to the medium term and to increase public confidence that we will not experience runaway inflation. [5]

It’s scary how well they match up as exact opposites. The “falling home prices” in [6] is conservative code for putting through as many foreclosures as possible, assuming that the number of bad assets is fixed.  That the quality of banking assets is related to overall economy and growth is something Christina Romer gets, and Meltzer got in 1999 as well.  Perhaps Satan had gotten to him back then.

Bonus.  I like Meltzer lecturing Occupy Wall Street on economics in his new book while calling for opportunistic disinflation in the US [5].  Instead of a period of higher inflation, Meltzer believes now is the time to set an explicit inflation target that could be less than 2% in order to opportunistically take advantage of disinflation.  I mention this and Occupy because now is a great time to post the best Occupy sign there is:

Damn right it is.

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