John, I am thinking back to that Richard Koo presentation you
posted a while ago. From what I read, Japan, over the past 20
years, has not tried just one approach that failed. So can anyone
say QE did not work or that debt reduction did not work, or
whatever-the-policy did not work?
it seems like Richard Koo was saying something like this; Japan
had rival political parties changing monetary policies OVER and
OVER during the past 20 years. Japan's PoliticalParty#1 did
stimulus and the enconomy began to recover, then PoliticalParty#2
came in and paid down debt and the economy faltered, then
PoliticalParty #1 was voted back in and applied stimulus again and
the economy began to recover. Then PoliticalParty#2 came back in
and paid down debt,and then PoliticalParty#1 did stimulus....
The link to the presentation has changed over time, and here is
the link; http://csis.org/event/economic-outlook- ... ichard-koo
Thanks for another excellent thought-provoking post and for your
work with Generational Dynamics.
I was very impressed with Richard Koo's presentation when I first saw
it almost two years ago, but over time I've come to see it as failing
in many ways.
One thing that was a problem right off was that Koo was not taking
into account that Japan was able to dig its way out of its worst
problems by exporting to China and the US, both of which have been in
bubble economies. Since that kind of opportunity is not available to
the U.S., Koo's theories simply don't apply to the situation that the
U.S. is in.
But now we see other problems as well.
The second problem is that Koo's stimulus proposals have completely
failed in Japan, despite the availability of exports. During the last
17 months, Japan's economy has been deflationary every month.
So Koo excuses himself, as you point out, by saying that the stimulus
wasn't applied at all times. Well, how long does it have to be
applied before it will work? It's now been 20 years since Japan's
stock market crash, and even with no stimulus at all, you'd think that
the deflationary spiral would have ended, instead of worsening. His
excuse is that the stimulus wasn't applied long enough. But a
perfectly reasonable alternate explanation is that the stimulus did
nothing to solve the underlying problems, but simply postponed the
unavoidable pain to another date.
Now we see the same thing happening in the U.S. Obama's stimulus ran
out in March, and does not appear to have helped more than
What bothers me about Koo is that he's never said anything, to my
knowledge, to explain these things, except for the standard excuse,
"You haven't used enough stimulus." He's never adapted his theories
to the changed circumstances, as far as I know.
There are two conflicting ideologies today -- the stimulus ideology
and the lower deficit ideology. The problem is, neither of them as
any hope of working, but the stimulus ideology postpones the worst for
In 2008, I posted** One, Two, Three ... Infinity
in order to capture a concept: That the stimulus ideology could not
work unless the stimulus amounts grew until they approached infinity.
Do you remember what happened when the credit crunch first struck in
August, 2007?** The nightmare is finally beginning.
What happened was that the Fed lowered interest rates by a percent or
so, and that solved the problem for a while.
In 2008, President Bush implemented the first stimulus program which,
as I recall, was for about $60 billion. Do you remember when $60
billion was considered a great deal of money? Today, it's peanuts.
Then in 2009 there were major stimulus packages around the world,
culminating in the EU's "gobsmacking" bailout package in May.** 11-May-10 News -- Europe's super-nuclear bailout
I would guess that up to $10 trillion dollars has been put out in
bailout and stimulus programs around the world in the past three
And so, at each step in this crisis, a bigger and bigger response has
been required, which is exactly the One, Two, Three ... Infinity
We're also seeing the Law of Diminishing Returns in action. It says the following: If you try to solve a problem by throwing money at it, then you need to throw more and more money at it each time.[Actually, the Law of Diminishing Returns applies to any situation
where you throw any single resource at a problem.** Fed's desperation move may be prompted by $50 billion Madoff swindle
** http://www.generationaldynamics.com/cgi-bin/D.PL?xct=gd.e081217#e081217** UN expert calls biofuels a 'crime against humanity'
** http://www.generationaldynamics.com/cgi-bin/D.PL?xct=gd.e071107#e071107Each time, you have to throw more and more of the resource at the
problem to get the same effect.]]
Getting back to Koo, what bothers me about him is that he never seems
to deal with any of these questions.
In addition, he never seems to deal with the question of the best way
to invest stimulus money. The Obama administration is accused of
wasting stimulus money by pouring into the coffers of labor unions.
Is that the right thing to do, according to Koo's theory? I don't
think it is, but Koo has been silent on the question.
So I've come to the conclusion is that Koo has a lot of good ideas,
but in the end he's just another ideologue advocating a political
position. Like all these other experts, all he really cares about is
that he keeps getting invited to give presentations and keep getting
quoted in the press, which gives him more prestige within his
employer, and allows him and his employer to charge higher consulting