Liquidity Trap or Statism Trap?
By Arnold Kling
In this essay, I take issue with Paul Krugman’s claim that the liquidity trap is relevant to Japan and the United States.
Krugman has learned the wrong lessons. He thinks that the bank bailouts are a good thing, that Japan’s problem is a “liquidity trap,” and that the U.S. also could fall into a liquidity trap.
In my view, Japan’s bank bailouts are a policy mistake, the liquidity trap is irrelevant, and Japan’s trap is its statist economic model. I hope that the United States can avoid falling into the statism trap.
For Discussion. Dugger and Ubide argue that Japan has become more averse to risk and innovation as its population has aged. Is the United States destined to go through a similar cultural change?