[ExI] A world drowning in excess savings

[John Clark]

This is a interesting column by Nobel Prize winning economist Paul Krugman:

The latest numbers from Japan are in, and they’re terrible
<https://nl.nytimes.com/f/a/wYgdD2PUMsxBtVmzEysORg~~/AAAAAQA~/RgRgLqRLP0T1aHR0cHM6Ly93d3cubnl0aW1lcy5jb20vcmV1dGVycy8yMDIwLzAyLzE2L3dvcmxkL2FzaWEvMTZyZXV0ZXJzLWphcGFuLWVjb25vbXktZ2RwLmh0bWw_dGU9MSZubD1wYXVsLWtydWdtYW4mZW1jPWVkaXRfcGtfMjAyMDAyMTgmY2FtcGFpZ25faWQ9MTE2Jmluc3RhbmNlX2lkPTE2MDc3JnNlZ21lbnRfaWQ9MjEzODEmdXNlcl9pZD0yNGZkOGU4NTE5YWM1YmFjYmFmZGEzNjY5MWU1ZDdhYyZyZWdpX2lkPTY3OTAzMTQ5MjAyMDAyMThXA255dEIKACFLH0xejjM6JFIUam9obmtjbGFya0BnbWFpbC5jb21YBAAAAAA~>
: 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
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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
<https://nl.nytimes.com/f/a/4X_9ycAWUcV1W2vepJNdyg~~/AAAAAQA~/RgRgLqRLP0TeaHR0cHM6Ly93d3cuYmxvb21iZXJnLmNvbS9tYXJrZXRzL3JhdGVzLWJvbmRzP3NyZWY9cXp1c2E4YkMmdGU9MSZubD1wYXVsLWtydWdtYW4mZW1jPWVkaXRfcGtfMjAyMDAyMTgmY2FtcGFpZ25faWQ9MTE2Jmluc3RhbmNlX2lkPTE2MDc3JnNlZ21lbnRfaWQ9MjEzODEmdXNlcl9pZD0yNGZkOGU4NTE5YWM1YmFjYmFmZGEzNjY5MWU1ZDdhYyZyZWdpX2lkPTY3OTAzMTQ5X3BrXzIwMjAwMjE4VwNueXRCCgAhSx9MXo4zOiRSFGpvaG5rY2xhcmtAZ21haWwuY29tWAQAAAAA>
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?
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