Wednesday, June 06, 2012

Spend More Now!

I found a new book written by Paul Krugman, "End This Depression Now" in the book store on my way back home. It had been four years since I met Krugman in his book, "The Return of Depression Economics".

I am not going to write this new book review, but after reading it and seeing the recent news about the stagnant economies of EU and, of Japan, my home country and the third-largest country in terms of GDP, I feel like writing about what I think about how to end this recession.

 My view on how to get the economy right sounds Keynesian, but my point is not that of what Keynes and Keynesians tell:

(1) Spend money

Who should spend money? That sounds a good question, but that doesn't matter at all. If you are one of so-called Keynesians, you should insist that the government should spend much money to strengthen the aggregate demand in the economy. But I wouldn't think so: It is good for the government to spend the money to build new houses, schools, hospitals and roads in the east-northern part of Japan that was hit by the earthquake last year. It is also good for the general people not to worry about what to spend on, but to buy what they need now (I need new shoes and trousers for business now.) Who spends the money doesn't matter. That's my point of this article.

If you don't have any money, you can't buy anything you want (but I would ask you how you make a living now with no money at all. You should have some money in your bank account and, I mean, if so, don't be thrifty with your money. Don't keep it in the drawer and use it to believe that it should return back to us. That's what money is like. )

Money is not what we should save, but what we use to buy something necessary for you to enjoy your life. To the best of my knowledge, Keynes (maybe Marx too) must have warned us against stocking money.   

(2) BOJ should buy more long-term government bonds

A little technical, but a basic idea on how the money circulates in the economy. BOJ, the Bank of Japan, equivalent to FRB in the US and ECB in the European countries, buys the bonds issued by the government from the private commercial banks, and then the money is paid to the banks and they get the money. The commercial banks will lend the extra money to someone else who needs most to build a new house or a new plant, and if he or she can borrow the money, he or she will spend the money on building a new house.

The question is, are the private banks going to lend the money to someone? I know that a lot of professional economists cast doubt on this point and that it is BOJ that insisted that the money wasn't spent as the theory says.

In the case of the Japanese economy, the private banks actually have bought a lot of the government long-term(10-year) bonds, not to lend the money to someone. The banks don't want to take any high risk and don't want their balance-sheets downgraded. Not to have bad loan, they usually buy safe and low-risk government bonds and don't lend the money to someone. (Yes, buying the government bonds is equivalent to lending the money to the government. The banks believe that the government should never go bankrupt and that the bonds are thus safe to buy. I don't know if the government bonds are really safe for sure. )

That's why some critics, as does BOJ itself, insist that BOJ's buying the bonds doesn't make any sense.
(3) Don't worry about the government budget deficit and debt

My opinion is, the government should have as many bonds bought by BOJ and the private banks as they can. The money the government borrowed from them should be spent on some necessary public programs. If the money spent on such programs circulates in the economy as a whole, the production, employment, national income and thus the tax revenue should increase. The government doesn't have to worry about the large budget deficit and debt because it will be able to decrease the deficit and debt with tax revenue increasing. Sounds nice. It's like a dream.

However, does BOJ buy as many bonds as it can? That's the problem. The private banks buy the bonds because they don't want to run high risk to lend the money to someone. I don't think BOJ is likely to buy much more bonds than it has bought now.

(4) Forced saving and Forced spending

Furthermore, if BOJ buys much more bonds as they can, what should happen in the economy? Yes, inflation. According to some textbooks, it sounds true. But is that truly true? As long as the general people keep spending the money, inflation is likely to come, or the prices are going up in the economy. But, this is an important point in this context, if they don't spend the money at all and save all the earnings they get by working, inflation won't come at all. The money stays in the drawer or in their bank accounts.

The important question is, should the money be spent if BOJ buys the government bonds from the private banks? No one knows. Just the government's issuing and BOJ's buying the bonds don't make the money to be spent.

There has been an idea called 'forced saving'. It sounds like the government forces us to save money. Right, but the saving also means an involuntary one(it is saving that occurs due to no available goods to buy.) and there seem to be some definitions. As far as I know, forced saving means that real income, real consumption decrease, and thus real saving(=income-consumption) increases as the prices go up.

At any rate, what does saving work for our economy? I would think of it as short-term and long-term; In the relatively poor society, as people earn more than they spend, the remaining should be saved in order to rebuild their house or pay the tuition for their children in the near future. In the economy as a whole, more saving leads to more physical or human capital accumulation and thus to more production and more employment. More saving means that people get richer in the long run though they get poor in the short run. Actually, decades ago Japan promoted saving by cutting the tax on it and increasing saving was the one of the important policies conducted for high economic growth.

But now there are a lot of stuff in the economy and much is unsold. That's why the prices are going down because stores can't help cutting their prices to have people buy their products. In Japan deflation stays alive and the value of the money people have is going up gradually, which makes it better for people to wait for the money to increase its purchasing power.

People save more due to deflation, though the original definition says that it is caused by inflation.This time needs somewhat a challenging policy that has so a great impact on the behavior of such people that it can stop them from saving their money: Now it is the time for them to spend more, not to save more. As I get a hint from 'forced saving', I would call this policy, "Force People to Spend", or "FPS".

In the well-developed economies, should less saving lead to less physical or less human capital accumulation? and thus to less production? In the long run it is true. But such rich economies are capable to produce more than the people need. In contrast, poor economies (I would call "Malthusian/Ricardian economies". Malthus and Ricardo are the economists who lived the 18th-century Britain. The then Britain saw the age of "Industrial Revolution" in the late 18th century and thus the dawn of the modern "Affluent Society", where goods are going around and their standards of living are becoming on average higher. So decades ago, Japanese economy  was the Malthusian/Ricardian one and promoted saving for high economic growth. 

Rich economies(I would call Keynesian/Galbraithian economies. Galbraith is my favorite economist and wrote an influential book, "The Affluent Society".), we can easily see a lot of stuff being sold and at the same time being unsold in the store/shopping mall. The prices should be going down(yes, yen is appreciating as of 05/June/2012, which is likely to make prices down.) and thus the real value of the money people have in their pockets is going up, where people think they should spend less to hold more money. Thus less money circulates in the economy and thus less should be spent. That should be called "recession" and should be the problem to solve quickly. What should we do?  Government should do something for people to spend more, not to save more, yes "FPS".

(5) Learn Mr. Ikeda's double income policy*

In 1960 then the Prime Minister of Japan, Hayato Ikeda, declared the policy called "double national income" in the newspaper, Nihon Keizai Shimbun, 09/March/1959. He identified himself strong in economics and finance, and he talked to the general people in the newspaper about what he thought about how to do for increasing the standards of life. What was "double national income"? What did he do? In fact, there was no concrete item in this policy. Mr. Ikeda did nothing but declared, (as Mr. Ikeda said in the Nihon Keiza Shimbun) "if there is the wise political leadership that induces you to work hard, it won't be impossible for you to double or triple your monthly pay in five or ten years."(Taro translated.)

Certainly that time was clearly booming: The Japanese economy, as well as the American economy, was growing fast, 10% average every year(This growth rate leads to double national income in around 7 years). In 1968 the GNP(Gross National Product) became the second-largest in the world and this (golden?) record hadn't been cracked until 2010. That time was bright, nothing was scared. That is what the Golden Age was like.

What Mr. Ikeda did is that he talked to the general people about how bright their future life will be and encouraged them to work, earn and spend more. His speak was very easy to understand and, say, one of his words was, "Poor people, eat barley. (It was then what poor people ate)!"    

(6) Self-fulfilling Economy

Mr. Ikeda himself didn't seem to be Keynesian, because in his duty, he didn't increase fiscal spending in an attempt to stimulate the economy. Rather, he was said to believe that that "the private companies should not be expected to ask the government for help but to take their own responsibility for the production activities."(Taro translated)

Of course, the government should play a big role to get the economy better: the government should take any possible action to induce the people to work, spend more. Mr. Ikeda's policy is one of the successful announcement policies and now I think we should follow his policy.

The economy(and we ourselves) is what is self-fulfilled: if we think we can do it, we can really do it. It sounds like Placebo effect, but something like Placebo should have caused the economy to move. It was Mr. Ikeda's double income policy: It wasn't based on any reasonable fact or data. Certainly, he had some great economists in his arm and they gave some advice to him, but double income policy itself didn't depend on any serious mathematical economic model because it was in the 1960s.

"Force people to spend"(FPS), as I insist,  is not as it sounds like: Each one is induced to spend more, not forced to spend more by the fearful central planner. The government should do something to induce people to spend more and, in this point, the government's role is not so small. Just only cutting tax or great public programs won't get the economy better, but the strong leadership(not dictatorship!) that seems like it gives birth to something new will get the stagnant economy right: Something will change. Something will happen. Such kind of bright expectation(belief or trust), though it isn't based on any reasonable fact, should induce the people to move forward, work more and spend more.

It is not so easy for the government to build such an environment, but we have a success story. Some pundits might say that their believing such a past success story has made Japan mad and stagnant ever, but I don't think so. The more people believe their future is bright or isn't necessary to worry about, the more money will run around. The economy will get recovered soon. Why not think so?   
*Reference: Yomiuri Shimbun, 08/October/2011