Forth Installment
Macroeconomic Policy and Measures for the Financial System
- Divided arguments (Part 1)
Disagreeing with Professor Krugman
The function of money as a medium of exchange or as a means of payment is always realized through financial institutions, such as banks, unless cash is delivered by hand. The existence of financial institutions should be the most important element in considering an economic model that emphasizes the role of money as a medium of exchange. However, money in this role is downplayed in arguments based on current macroeconomics. Meanwhile, the financial system (the overall system of financial institutions) is simply treated as an ambiguous entity. The following reveals a dispute with Professor Paul Krugman (Princeton University) over a column of mine that appeared on the Internet.
The dispute was triggered by an English translation of a column contributed to the weekly Shukan Bunshun, which I posted on voxEU (a website where economists from Europe and North America post their columns and introduce their research on current events) on April 1. The following is an excerpt from that column:
Professor Paul Krugman, renowned columnist and 2008 Nobel laureate in economics, commented on my column. Prof. Krugman posted a counterargument to my column on his blog in the electronic version of The New York Times, although he did say he basically agreed with my views. The following is the gist of Prof. Krugman's argument:
I then published a response to Prof. Krugman's comment in a column. The following is an English translation of my column written in Japanese in The Asahi Shimbun:
Which is the driving force behind economic recovery, the disposal of nonperforming loans, or exports?
If the expansion of bank credit had been the driving force of the economic recovery, corporate capital expenditure should have increased. However, there was no such tendency when the Japanese economy recovered, argues Prof. Krugman, concluding that the return to health of the banking system after the disposal of nonperforming loans had nothing to do with the economic recovery. Prof. Krugman says that not only in Japan but during financial crises around the world in the past, the driving force behind the recovery was increases in exports (typically due to drops in currency value). He pointed out that the difficulty in the current global crisis is that the existing formula for pulling economies out of financial crises does not hold, since the entire world is in crisis and the global economy cannot recover by increasing exports (from Earth to some other market) in accordance with the formula. (Prof. Krugman jokes, "The only thing we can do is to export to Mars.")
I have not written further counterarguments in English. However, I have not been convinced by Prof. Krugman's views. First, he assumes that returning the financial system to health will prompt companies to expand capital expenditure, a view that considers only one aspect of the functions of the financial system. His view is based on the assumption that unsound financial institutions cause credit crunches, which will (excessively) contract the supply of funds to companies, which in turn will limit investment and slow the economy down. However, if uncertainty and distrust surrounding the payment intermediary service (the fund settlement function, which is a major function of the financial system) increases, credit crunches occur not only on the fund supply side. Even if financial institutions would like to extend loans, borrowers might not borrow because of the uncertainty and distrust. Moreover, corporate activities associated with payments through the financial system are not limited to capital expenditure. Payment through financial institutions, including the payment of wages and the payment for purchases of raw materials and intermediary goods, is related to every aspect of production and sale, as well as to investment. I suspect that Prof. Krugman's argument does not take into sufficient consideration the effects of impediments to a broad array of payment types.
(To be continued)
* Translated by RIETI from the original Japanese article in the series, "Gödel's money" published in the August 24, 2009 issue of Kinzai Financial Weekly