Monday, July 06, 2009


Does Richard Koo- 'Super Keynesian' Economist- Have the Answer?

No I hadn't heard of him either until Will Hutton wrote about him yesterday. However I learn this Japanese economist is a very clever man, the toast in fact, of that doyen of the 'miserable science', Nobel Laureate, Paul Krugman. So what's his angle? Well, it seems his views have been tempered by his own country's dire experiences over the past decade and a half, locked, as it has been, in near permanent recession.

He thinks we in te west are teetering on the brink of a '1930's style depression' and are far too premature in perceiving those fabled 'green shoots'. He bases his prognosis on Japan's recent history:

Koo observed that Japanese firms in the 1990s and early 2000s had changed from profit maximisers to debt minimisers. Between 1970 and the early 1990s... they had steadily built up their debts to finance investment and growth; from the early 1990s on they used every spare yen to pay these off. Even as interest rates fell to zero and firms seemed to have profitable opportunities for growth, they would still pay off their debts rather than invest. Japan's $15tn collapse in asset and share prices - equivalent to three years' GDP - traumatised them, because it meant that their grossly devalued assets no longer matched their liabilities. To restore their balance sheets to health they had to reduce their debts. Demand from Japan's corporate sector dropped by 20%.

He argues that once into their 'debt minimizing', companies defy conventional monetary thinking and close down the mechanisms-spending, investing- which will restore good health. Koo explains Japan's 180% of GDP debt as the reason why a major Great Depression in Japan has been averted. So Koo is a 'super Kenynesian' who urges more not less spending to avert an otherwise highly probable disaster. According to this view, the high bank interest rates in the UK are forcing companies to repay debt rather than investing. The same thing is happening in Germany and USA.

Seen from this angle Darling's caution over borrowing seems foolish and Gordon's alleged profligacy extraordinarily wise. Is Koo just another clever man who has got it wrong.. or has he got it right? With both parties coming around to expenditure cuts the UK is heading in the opposite direction to that Koo would advise. His analysis seems so clear it's almost as if one believes him to be the 'one eyed king' in the land of the blind. As a non economist, I'm never sure but merely flag up this guy's name and ideas in case they turn out to be on the money.

I've just finished Koo's latest book. I think his analysis of the Japanese economy and in the later chapters the comparison with America's situation, is the only explanation I've seen that accounts for the behavior that has been observed of late. His overhaul of Keynes (Keynes got the prescription right during the 30's but actually misdiagnosed the problem) is brilliantly developed and documented. I would not be surprised to see My. Koo in Stockholm as a Nobel winner himself /
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