I think this is pointing to how our foray into Keynesian economic theories has become a dismal failure. All we got was debt and no growth and it's pretty much the same for Europe and Japan.
That's a bullshit assessment, as Keynes discusses the liquidity trap rather extensively. Under normal circumstances, lower interest rates should increase the demand for money and help restart the investment cycle. However, given the low level of aggregate demand, the equilibrium interest rate lies below 0% - which explains why we're seeing negative interest rates in Germany, Austria, Denmark, Switzerland, and elsewhere - but most investors are not willing to lend their cash for securities at a negative interest rate. Thus, we're observing not the failure of Keynesian economic theory, but rather the limits of monetary policy in a liquidity trap.
If the industrialized world's governments would start priming the pump through deficit spending (e.g, an aggressive infrastructure program), we'd see some demand and inflation, and central banks would get their mojo back. But there's all this moralistic hand-wringing from Berlin to London to Washington about how evil deficit spending is. Result: it has taken years, and (especially in the face of Brexit) will take several more years to get the economy moving again.
Other examples: examine how massive deficit spending in the U. S. in the period after 1939 helped us exit the Great Depression, or how aggressive investment in the Interstate Highway System in the 1950s spurred more growth.
This is one of the rare times where I think Yaeger is more spot on. Deficit spending has limits to effectiveness. A World War is a completely different beast than infrastructure improvements and I've yet to read an essay on the link between highway building and U.S. economic growth. If you want to see the limits of deficit spending see Japan. No amount of government 'monetary easing' has turned around their deflationary stagnation. Part of me wonders if constant growth above levels in line with population growth is a 19th and 20th century aberration?
Yaeger indicted "Keynesian economic theories".
I restated Keynesian economic theories, which cover both monetary and fiscal policy.
You confounded monetary and fiscal policy.
Quantitative/monetary easing (monetary policy) and deficit spending (fiscal policy) are two different animals. It doesn't make sense to say, "well, we bought a lot of bonds and so obviously fiscal policy is useless!" Japan's structural deficit and huge debt doesn't exist because they spent wildly trying to jump-start their economy. It happened because the GDP kept dropping, and Japan is now significantly poorer than it was in 1997. They didn't pursue loose monetary policy during most of this time, and they often increased taxes to attempt to fix the deficit. Hopefully we can learn something from their failures instead of repeating them.
Uh, no. Japan's GDP is $300 billion higher now than in 1997 and was a $1 trillion higher a decade after 1997 prior to the Great Recession.
Japan has raised the Vat while continuing to operate with Deficit spending year after year above 5% of GDP. Neither of those 2 things has anything to do with easing of monetary policy which they have also done. Japan has consistently spent billions of dollars more annually than it has brought in. They also have negative interest rates which is as loose a monetary policy as you can have. Neither deficit spending nor extremely loose monetary policy has fixed their ills. The deficit spending of World War 2 was an organic change. Japan's forced economic expansion has demonstrated that you can't just engineer your way to a healthy economy.
http://www.tradingeconomics.com/japan/government-budget
http://www.kushnirs.org/macroeconomics_/en/japan__gdp.html
First of all, while Japan's GDP did increase from 1997 to 2008, I wouldn't use a US dollar-denominated graph to make my point, because now you're adding exchange rate variation fuzziness, which dilutes your point.
Let's separate monetary policy from fiscal policy:
Monetary policy: the Bank of Japan has held interest rates at near zero for nearly two decades for at least two reasons: 1) the BoJ is trying, mostly in vain, to avoid deflation; 2) the BoJ wants to stimulate GDP growth. The problem is that Japan is in a liquidity trap, and the interest rate that would spark the inflation the BoJ seeks lies well below the zero lower bound.
Fiscal policy: the Japanese government has run a budget deficit since about 1993. After the lost decade began, Japanese politicians were loathe to use deficit spending in sufficient quantities to revive the economy, and the economy has essentially stagnated since then (cf.
http://www.tradingeconomics.com/japan/gdp-growth). I assert that the GoJ should have invested much more to fill the gaping hole in aggregate demand from the late '90s. However, the GoJ only increased their infrastructure investment program after the Great Recession, when the budget deficit increased from about 3 to about 8% of GDP in 2008, though the deficit has declined since. Japan still hasn't recovered with the kind of growth that would stimulate inflation, and has recorded deflation in the last three quarters (cf.
http://www.tradingeconomics.com/japan/core-inflation-rate).
As you mention, they did increase VAT in April 2014, and, as Keynes would predict, the little growth that they experienced just before the rise mostly vanished, as consumers contemplating big-ticket purchases completed them ahead of the VAT increase. Recognizing its dumb move, the GoJ postponed the second VAT increase, as it would also brake demand even further.
All of this is taking place in the context of population decline in Japan, which also automagically brakes growth.
The BoJ would very much like to have monetary policy take over for fiscal policy in managing the economy, as they recognize that after a while, one runs out of infrastructure construction that makes sense, especially in a country with a declining population. But with interest rates at zero, they're out of gunpowder.
Nevertheless, I still don't see how Keynes's framework doesn't explain what happened - the models, especially the liquidity trap model - has acquitted itself well. If anything, Japan's experience, with national debt exceeding 200% of annual GDP, demonstrates overwhelmingly that the U. S. - with very low inflation, moderate growth, moderate budget deficits, and moderate population growth - is in infinitesimal danger of hyperinflation (assuming that is still what this thread is about).
