Matt Yglesias has moved, which creates a dilemma. Do I keep reading the old link at Slate, and then end up reading all the other fascinating/appalling non-Moneybox articles written by the kids over there, or do I follow him to his new link? I don’t have time for both. Here Yglesias quotes from Tim Geithner’s book Stress Test:
Loose monetary policy can have limited power in a crisis, because low interest rates don’t help that much when borrowers don’t want to borrow and lenders don’t want to lend, but as the central bankers of the 1930s demonstrated, tight monetary policy can be disastrous.
That last claim caught my attention. I wondered why Geithner thought money was tight during the 1930s. I presume he’s mostly referring to the Great Contraction, from roughly August 1929 to March 1933. Here are some things the Fed did during the Great Contraction:
1. Short term interest rates were cut quickly and sharply, from about 6.5% to just above zero.
2. When rates got low the Fed did more and more QE, raising the monetary base through open market purchases of securities.
3. There was also the Reconstruction Finance Corporation, aimed at helping to support the banking system.
I know what you are thinking; “Sumner, haven’t you claimed those indicators are misleading, and that money has been tight since 2008 despite all the QE and rate cuts?” Yes, that’s what I’ve been saying. And yes, I believe Geithner is right in claiming that money was tight during the 1930s.
But here’s what I can’t understand, why does Geithner think money was tight during the 1930s? I’m pretty sure he’s not a market monetarist, based on his other expressed opinions. I suppose he might cite the Friedman and Schwartz data on M2, but does anyone seriously think he uses M2 as an indicator of the stance of monetary policy? Didn’t the Fed stop publishing M3 (its modern equivalent) because almost no one even cared?
So once again, what are these “lessons” that the Fed learned from the Great Depression? Why does Geithner think monetary policy was tight in the 1930s but easy since 2008? How does he determine the stance of monetary policy?
But there are some things mainstream economics doesn’t seem to explain very well.
For example, on the neoclassical theory poor countries that successfully get rich should do so by liberalizing their financial systems, running trade deficits, and importing foreign money until over time they build up enough capital for the marginal productivity of labor to increase. In practice, successful catchup stories (first in Japan, then in Singapore and Taiwan and Korea, now in China) work the other way around — countries use financial repression and run trade surpluses to develop increasingly sophisticated local businesses.
During Korea’s high growth phase they ran fairly consistent current account deficits. Between 1960 and 1985 I am pretty sure they ran deficits every single year, averaging close to 8% of GDP. That was because domestic investment was far higher than domestic saving. Then they moved into surplus in the late 1980s, before moving back into deficits in the 1990-97 period. I think people have a tendency to assume that because Korea has recently run surpluses, it has always done so. It did things the correct way, borrowing when it was poor to build up its capital stock.
Why quibble over a single country? Because some people (not Matt) make sweeping conclusions based on a single characteristic of a successful country. I suppose I’ve been guilty at times. One thing Korea did do, for instance, is infant-industry policies. But Hong Kong was just as successful without those policies, and AFAIK, they have not played a particularly important role in a few of the other cases (these things are actually hard to measure, for instance import tariffs and export subsidies offset each other. If the two policies are done across the board they net out to nothing.)
I don’t know what explains all of the East Asian growth miracles, but I’m skeptical of factors that show up in only some of the countries. Those factors might have helped, but I doubt they were decisive, especially if others did just as well without those policies. Perhaps the closest thing to a generalization one can make is “export-oriented.” But how did they do that?
PS. In a recent post I quoted Paul Krugman claiming that he couldn’t think of important intellectuals on the other side changing their mind after the worries of high inflation didn’t pan out. Later a bunch of people sent me one quote after another of Krugman praising policy hawks like Kocherlakota and Arthur Laffer for having the guts to admit they were wrong and change their mind. One commenter prefaced his comment with, “In Krugman’s defense.” That made me smile. Please, I beg of you, don’t ever “defend” me that way.