A Note Re Krugman
It's not unusual for me to disagree or think of some correction to Paul Krugman's analysis but the guy has a Nobel Prize in Economics and I don't so I tend to keep my mouth shut. When he misses a key fact, though, I think it's worth noting as a sort of reminder that it's always dangerous to apply generalizations to specific contexts one doesn't know much about. Easier said, though, than done.
In his column today Krugman praises Japan for cranking up government spending, contrasting that spending with recent Japanese history and, of course, with the austerity-philia of western governments across the board. In a throw-away line he ascribes current Japanese policy to tofu barrel spending or some such, as if the Japanese couldn't possibly know what they're doing. Perhaps, however, this is unfair. There is a very good example in Japan's less recent economic past that tracks with today's shift and may help explain it in more purposeful terms. Indeed, I'm sufficiently interested in this question that I may contact the press office of the Japanese Embassy, identify myself as a "blogger", and ask whether they can confirm my supposition.
We have to go back to the oil crises of 1973 and 1979 and look at how OECD countries handled them. The accepted economic theory at that time was that a price spike in oil would result in harmful inflation. So in 1973, after the spike, all OECD countries cut back, sharply, on their money supply. All suffered recessions. By 1979, however, some economists had raised doubts about the inflation worry — because oil sales are such a tiny fraction of GDP it hardly makes sense to think that oil price spikes alone could set of a dangerous round of inflation. Japan, then, alone among the OECD countries, responded to the 1979 oil price spike not by cutting back their money supply, but by expanding it. And Japan, again alone, avoided a recession.
Surely there are economists within the Japanese government bureaucracy who have either a living memory of those events or were trained as younger officials to keep that oil price spike example in mind when developing policy. Krugman may be right and it may be that the Japanese got lucky and hit on the right policy for the wrong reasons. But I doubt it. And if I'm right then we should give credit where credit is due.
If you're curious how I happen to know about this, I was the desk officer for oil security for consuming countries (my counterpart desk officer covered producing countries) during the first Gulf War. And I made it my business to know everything about oil policy. Probably I don't know everything — well, I'm sure I don't — but I know enough to put together some solid professional arguments.