Date: 2024-12-21 Page is: DBtxt003.php txt00018308
Public Finance
Wrong Policy Priorities
A world drowning in excess savings
Peter Burgess
Paul Krugman
12:30 PM (24 minutes ago) to me
Here’s a snapshot of the Hong Kong share index at Hong Kong Stock Exchange on Monday. Markets are mixed in Asia, with Japan’s benchmark slipping after the government reported the economy contracted in the last quarter.Vincent Yu/Associated Press
By Paul Krugman Opinion Columnist
The latest numbers from Japan are in, and they’re terrible: In the fourth quarter of last year Japan’s economy shrank at an annual rate of 6 percent. And no, it wasn’t the coronavirus: we won’t see the negative effects of that shock until the next set of numbers.
But there’s nothing mysterious about Japan’s stumble. It was the result of an extremely ill-advised turn toward fiscal austerity, in this case taking the form of a hike in the value-added tax.
The thing is, nobody should have been surprised at this outcome. Over the past decade we’ve seen many, many experiments in fiscal austerity — raising taxes or cutting spending. And without exception the impact of fiscal tightening has been to shrink the economy. We’ve also seen a few experiments in deficit spending, most notably the explosion of the U.S. deficit under Donald Trump, and bigger deficits have consistently given the economy a boost.
So was fiscal responsibility always a terrible idea? No. It was never a great idea — claims that deficit reduction would produce a surge in private investment, which I once mocked as belief in the “confidence fairy,” were never supported by the evidence. But the world has changed in ways that make austerity policies more destructive than they used to be.
You see, in the past it was relatively easy to offset the negative effects of austerity with other policies: as nations tried to balance their budgets, their central banks — the Federal Reserve and its sister institutions — could help sustain the economy by cutting interest rates.
Today, however, interest rates are very low even when economies are strong — around 1.5 percentage points in the U.S., actually negative in much of Europe and Japan. So there’s little or no room to cut to offset the depressing effects of austerity.
But why are interest rates so low? The answer basically comes down to a global excess supply of saving: around the world, people want to save more than businesses are willing to invest in new factories, office parks, and so on. This leaves the world awash in savings that are all dressed up with nowhere to go, which is in turn a world in which bond markets are effectively begging governments to borrow and spend.
And governments should take them up on the offer. The sensible, prudent thing to be doing now would be to borrow at these low, low rates and use the money for public investment: rebuilding our creaking infrastructure, subsidizing new technologies (especially green energy), and making sure that children have adequate health care and nutrition.
Of course, we’re not doing that in America: the Trump administration is borrowing vast sums, but squandering the money on tax cuts for corporations and the wealthy. Yet even that is preferable to the behavior of governments that are still hung up on the notion that prudence means balancing the budget — and as we’ve just seen in Japan, seem unwilling to learn from the repeated disasters of austerity.
Now is the time to borrow and invest. But is anyone willing to do the obviously right thing?
------------------------------------------------------------
Quick Hits
The now-classic IMF paper finding large negative effects of austerity policies.
Fiscal policy across U.S. states.
The great austerity panic.
The facts have a well-known Keynesian bias. Feedback If you’re enjoying what you’re reading, please consider recommending it to friends. They can sign up here. If you want to share your thoughts on an item in this week’s newsletter or on the newsletter in general, please email me at krugman-newsletter@nytimes.com. Facing the Music