Advice to Japan Jude Wanniski May 1, 2001

Memo To: Paul Krugman, NYT columnist
From: Jude Wanniski
Re: Letter to the Times

You may have seen the letter I wrote to the Times concerning your April 25 column, as it ran on Saturday, but to make sure I append it below. It came at a good time, as your advice to Japan’s new Prime Minister, Junichiro Koizumi, was extremely well-taken and I was happy to lend my supply-side concurrence to your neo-Keynesian suggestion. The Japanese economy has been suffering from a severe case of monetary deflation for a decade, as the Bank of Japan has confused lower interest rates with easy money. Its “zero interest rate” policy was supposed to expand the economy. Instead, the route by which they got to zero interest rates brought down the price of gold to under ¥30,000 per ounce from ¥65,000 in 1989. Your advice that Japan induce a moderate inflation has been our advice for the last several years, and you indicate you don’t expect them to follow your advice either, but with the political change in Tokyo, perhaps the time is ripe. The inept director of the Bank of Japan, Masaru Hayami, may be on the way out, and one hopes his successor would be open to fresh ideas.

Next, Professor Krugman, I’d hope you would take a look at the monetary deflation our Fed Chairman has induced. While not as severe as Japan’s, the evidence is also a sharp decline in the price of gold, in dollars, to its current $263 from $383 in November 1996 when the Fed began its deflationary ways. There is actually nothing in the Keynesian model that would explain this as a monetary deflation, but you could browse through the Austrian school, particularly Ludwig von Mises magnum opus, Human Action, and find the theory there. I say that knowing how you refuse to take any economic advice from people who do not have doctorates in economics. Von Mises had a bona fide Ph.D. If he were around today, I would bet he also would have appreciated your column and also would urge Fed Chairman Alan Greenspan to undertake a modest inflation, to cure the deflation he has wrought.

Note that I did take issue with your criticism of Herbert Hoover’s Treasury Secretary, Andrew Mellon. Our universities have been teaching economic students for several decades that Mellon was wrong to advise Hoover in 1930 to “liquidate labor, liquidate capital,” etc. But the term “liquidate” had taken on a new meaning after World War II, when it became associated with the “liquidations” of the enemies of the state in the Soviet Union. Mellon’s use of the term “liquidate” only meant dollar prices should fall in order to clear the market of surplus inventories. It was a benign term at the time, but was used by lefties to ridicule a great Treasury Secretary, a genuine supply-side hero -- although Mellon did not have a Ph.D. His “liquidate” quote has appeared many hundreds of times in the NYT over the last half century, you being the latest to misunderstand. Now that my letter has run, I hope to not see its misuse again.

To the Editor:

In “Purging the Rottenness” (column, April 25), Paul Krugman correctly advises Japan's new prime minister, Junichiro Koizumi, to inflate the yen. The Bank of Japan tries to expand the economy with a zero-interest-rate policy. The side effect has been to deflate the yen, which only the mild inflation Mr. Krugman suggests can cure. Mr. Krugman errs, though, when he blasts Andrew Mellon, Herbert Hoover's Treasury secretary, for his 1930 advice on what was still a
recession: “Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate.”

That was good advice, as Hoover's Smoot-Hawley Tariff had caused an “inventory recession.” Goods already produced had piled up against the high tariff wall, as foreigners could not afford to buy them when they could no longer export to us. The inventories had to sell off, which meant that all factors had to become more liquid, a brief condition. Hoover instead raised taxes, producing the Great Depression.

JUDE WANNISKI
Morristown, N.J., April 25, 2001
The writer is a political economist.