Richard Koo, Chief Economist of Nomura Research Institute, has had a pretty simple and consistent thesis for years: private sector balance sheets are plagued by huge debt overhangs, and as they delever, the government must borrow and spend to prevent a deflationary spiral.
"Average citizens find it hard to understand why the government should not balance its budget when households and businesses must all do so," writes Koo in a new piece for the Financial Times. "It is risky for politicians to explain but, until they make it clear that the economy will implode if everybody is saving and nobody is borrowing, public support for the necessary fiscal stimulus is likely to weaken, as seen during the past four years of the Obama administration."
Koo points to the Japanese experience as a case for how cuts go wrong:
Japan’s attempt in 1997 to reduce its deficit by 3 per cent of GDP – the same size as the “fiscal cliff” now facing the US – led to a horrendous 3 per cent drop in GDP and a 68 per cent increase in the deficit. At that time, Japan’s private sector was saving 6 per cent of GDP at near zero interest rates, just like the US private sector today. It took Japan 10 years to climb out of the hole.
Here's a chart that Koo often uses to communicate this:
"In 2008, Barack Obama told the US people the nation’s economic crisis would take a long time to overcome," he writes. "In 2012, many of those voters are losing patience, because they have not been told why this recession has lasted so long or why his policies were the correct response."
Koo is arguing that, while it may be counterintuitive to many, Obama is on the right track. People just need to be patient.
Read the whole piece at FT.com.
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