Twice is enough (and don’t expect miracles)

Six weeks ago I read this post by Edward Hugh:

The question I would ask is this: given all the doubt which exists about the real roots of Japan’s problem, and the fact that it may well be a permanent structural problem and not a temporary liquidity trap one, is it really justified to run such a high risk, all-or-nothing experiment? Even Paul Krugman seems to have changed his assessment various times since the  problem started and while he still fully supports the general approach being taken he now thinks the natural rate of interest may remain permanently negative and that fiscal stimulus might be necessary on a permanent basis (liquidity trap without end, amen).

What makes people like me nervous is the thought that if the central bank can’t deliver on its promise to deliver inflation, or if the Japanese voters decide they have had enough of the experiment, then a loss of confidence might ensue, and all those dubious risky asset positions might unwind suddenly, just like an earlier set did in 2008.

And there are plenty of people in Japan who have been pointing this out all along. Seki Obata, a Keio University business school professor for example, who in 2013 published a book “Reflation is Dangerous,” argues exactly this, that “Abenomics” is exposing Japan to considerable risk without any clear sense of what it can accomplish. Obata also makes the extremely valid point that there is simply no way incomes can rise across the entire economy because the baby boomers are now retiring to be replaced by fewer young workers with post labour reform entry-level wages. Japan’s overall consumer spending power will therefore fall, rather than rise as Abe hopes. “Individual companies may offer wage increases, but because of demographics it is simply impossible to increase the total amount that is paid out in wages,” says Obata. “On the contrary, that amount will shrink.”  Simple logic you would have thought, but logic in the face of irrational exuberance scarcely stops people in their tracks.

As far as I can see, all of this  points to one simple and evident conclusion: that Japan needs deep seated cultural changes, especially ones directed to greater female empowerment and more open-ness towards immigration. Hardly matters for central bank initiatives, and indeed ones for which Shinzo Abe, who naturally has given his name to this new economic trend, is singularly ill equipped to carry through. Japan needs a series of structural reforms – like those under discussion around the third arrow – but these would be to soften the blow of workforce and population decline, not an attempt to run away from it. Monetary policy has its limits. As Martin Wolf so aptly put it, “you can’t print babies”.

The above is based on arguments fleshed out in much more detail in my  “mini book” the A B E of Economics.

Then today Tyler Cowen directed me to this brand new post by Edward Hugh:

On the other hand the administration still has to decide whether to go ahead with next year’s additional tax hike. The government is caught in a double bind, since if it doesn’t raise the consumption tax as planned and cuts spending to compensate then the economy will still contract. And if it doesn’t do either of these things  then the debt level will continue its march upwards. At the moment the government is mulling the idea of raising the tax and doing a 5 trillion yen ($47 billion) additional stimulus to compensate. Which sort of leaves me wondering why they want to raise the tax in the first place.

What makes people like me nervous is the thought that if the central bank can’t deliver on its promise to deliver inflation and revive the economy, or if the Japanese voters decide they have had enough of the experiment, then a loss of confidence might ensue, and all those dubious risky asset positions might unwind suddenly, just like an earlier set did in 2008.

And there are plenty of people in Japan who have been pointing this out all along. Seki Obata, a Keio University business school professor for example, who in 2013 published a book “Reflation is Dangerous,” argues exactly this, that “Abenomics” is exposing Japan to considerable risk without any clear sense of what it can accomplish. Obata also makes the extremely valid point that there is simply no way incomes can rise across the entire economy because the baby boomers are now retiring to be replaced by fewer young workers with post labour reform entry-level wages. Japan’s overall consumer spending power will therefore fall, rather than rise as Abe hopes. “Individual companies may offer wage increases, but because of demographics it is simply impossible to increase the total amount that is paid out in wages,” says Obata. “On the contrary, that amount will shrink.”  Simple logic you would have thought, but logic in the face of irrational exuberance scarcely stops people in their tracks.

As far as I can see, all of this  points to one simple and evident conclusion: that Japan needs deep seated cultural changes, especially ones directed to greater female empowerment and more open-ness towards immigration. Hardly matters for central bank initiatives, and indeed ones for which Shinzo Abe, who naturally has given his name to this new economic trend, is singularly ill equipped to carry through. Japan needs a series of structural reforms – like those under discussion around the third arrow – but these would be to soften the blow of workforce and population decline, not an attempt to run away from it. Monetary policy has its limits. As Martin Wolf so aptly put it, “you can’t print babies”.

The above analysis is based on arguments fleshed out in much more detail in my  “mini book” the A B E of Economics.

Sorry Edward, I think I’ll pass on the book.  Reading your analysis twice is enough for me.

Seriously, the first paragraph of the newer quotation is different, and greatly improved.  Abe has talked about supply-side reforms but failed to deliver.  Raising both taxes and government spending is not supply-side economics, last time I checked.

It was obvious from the beginning that Abenomics would both “succeed” and “fail.”  It would succeed in the sense of pushing the Japanese economy closer to full employment, and in reducing the burden of the debt, relative to the non-Abenomics trajectory.  I don’t think anyone can deny that it has achieved those two very limited objectives.  And it was also always obvious that it would be likely to come up somewhat short of 2% inflation, that RGDP growth would remain very low, and that the debt situation would continue to be quite dire.

Japan is a country where the national debt is as high as Italy (higher in gross terms), where the workforce is falling at 1.2% per year, and where the government is unable to enact supply-side reforms due to special interest politics within his own party.  That was always a scenario for “failure,” and no one should be surprised by the weak RGDP growth, or the fact that a 3% boost in sales taxes cut real wages.

Readers confused by Hugh’s relentless pessimism about Abenomics might have trouble deciphering the second paragraph in each quotation.  So let me translate into easier to understand language:

“What makes people like me nervous is that Abenomics might be abandoned and the BOJ might return to the deflationary policies of the previous 20 years, causing an economic catastrophe in Japan.”

If that’s what he was trying to say then I wholeheartedly agree.  I just wish he’d said it very clearly one time, instead of very obscurely twice.  There’s a danger that some readers might think that the claim that Abenomics equals disaster implies that “not Abenomics” equals less disaster.  That would be unfortunate given that not Abenomics equals a bigger disaster.

If you want to know what Japan is up against consider that Japanese RGDP has grown by 0.00% per year over the past 6 1/2 years.  In contrast, Germany, the shining star of the European economy, has grown at 0.5% per year over the past 6 1/2 years.  Then consider the fact that the Japanese workforce is falling at an accelerating rate, and unemployment is already at the lowest level in decades.  How fast do you expect Japan to grow?  Negative growth will be the norm; zero growth is the new “economic miracle.”


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43 Responses to “Twice is enough (and don’t expect miracles)”

  1. Gravatar of Saturos Saturos
    21. September 2014 at 17:05

    Emanuel Derman’s comment on Piketty is really great: http://www.theguardian.com/money/2014/sep/21/-sp-thomas-piketty-bestseller-why

  2. Gravatar of Jason Jason
    21. September 2014 at 17:25

    Inflation still seems to be coming in right where this model expects it:

    http://informationtransfereconomics.blogspot.com/2014/09/update-on-japanese-inflation.html

    Japan appears to still be in the “liquidity trap”.

  3. Gravatar of Major.Freedom Major.Freedom
    21. September 2014 at 18:53

    It is just a coincidence that every country with massive monetary stimulus, but have faltered, are being specifically targeted and labelled as not inflationary enough.

  4. Gravatar of Alexei Sadeski Alexei Sadeski
    21. September 2014 at 19:03

    1. When discussing GDP growth rates in Japan, one should adjust for working population delta as well, yes?

    1a. GDP of $1T with 100 workers is much different from a GDP of $2T with 400 workers, for example.

    2. Prescription of immigration for one of the most densely populated nations on earth seems odd.

    3. Is there a miracle cure to paying off debt accrued by previous generations?

  5. Gravatar of dtoh dtoh
    21. September 2014 at 19:29

    A few comments.

    The low birth rate is an effect of low economic growth not the cause.

    Proper monetary policy would probably get Japan to real growth of 1.5%

    A policy which consisted of a) a large reduction of taxes on capital, b) at will employment, and c) the ability to easily evict tenants or owners who are delinquent on their rent or mortgage would get Japan 7% annual real growth over a sustained period.

    It would also cause the birth rate to soar.

    Immigration is not the problem. It’s easy to immigrate into Japan and they’re are many young immigrants. The problem is that many don’t stay because the opportunities are better back home in Thailand, China, Vietnam, Philippines, etc.

  6. Gravatar of Benjamin Cole Benjamin Cole
    21. September 2014 at 21:20

    Re Edward Hugh: When you get old, you start repeating yourself…Did I tell you when you move up in years, you sometimes say the same thing again?

    Anyhow, I hereby have the fix for Japan. It is the Excellent Solution Universal for Modern Economies (USE-ME), and it goes like this:

    Holiday on payroll taxes, and finance through QE. Those are the magic words. Forget everything else you have ever read.

    That is, in the USA, we would put on ice Social Security and Medicare taxes (FICA), and the Central Bank would print the money and put it in the trust funds. Or, to keep traditionalists happy, the Treasury Department would issue notes, and Federal Reserve would buy the notes.

    I don’t know how taxes work in Japan, but they would copy close as they can.

    The USE-ME solution lowers hurdles for workers and employers, and increases spending and cash in circulation. It may actually be deflationary (labor costs go down by 14-15 percent) so you really have to give the economy a lot of monetary gas, through QE—say about $1 trillion a year. Hey, that is just about the amount collected in FICA taxes! Perfect fit.

    Classic economists will note that USE-ME taxes productive people less. Yes, how about that? We do not tax productive behavior. Oh, what an idea!

    With USE-ME, Japan can grow, they can get women to work, they can raise retirement ages, they can import workers for specific factory jobs (they do this with Third World women and fish canneries etc).

    Japan should start having bonuses for babies.

    I decry defeatism. Central banks have asphyxiated the developed world, but that does not mean we have to accept permanent stagnation.

  7. Gravatar of ssumner ssumner
    22. September 2014 at 04:41

    Saturos, It seemed like he had no comment, he hadn’t read the book. Isn’t he just complaining that economists disagree about certain things?

    Alexei, You said:

    “When discussing GDP growth rates in Japan, one should adjust for working population delta as well, yes?”

    That’s what I said, isn’t it?

    dtoh, You said;

    “The low birth rate is an effect of low economic growth not the cause.”

    I’m afraid not, as birth rates are even lower in Korea, Singapore, HK, Taiwan, etc.

    You said:

    “Proper monetary policy would probably get Japan to real growth of 1.5%”

    I see no evidence that this would occur for more than a few years. That would require implausibly high productivity growth.

    Ben, You said:

    “When you get old, you start repeating yourself…Did I tell you when you move up in years, you sometimes say the same thing again?”

    I sometimes say the same thing, but word for word for 4 paragraphs?

  8. Gravatar of collin collin
    22. September 2014 at 04:45

    So for all of Japan problems how is China any different than Japan of 30 – 40 years ago. Huge investments fueled by investments made by manufacturing exports with a working class that keeps lower wages with minimal family investment. (Japan’s birth rate has been low since the 1970s so it is not the economic situation causing the low birth rate.

    In terms of supply side economics, isn’t higher birth rates the signal of more supply?

  9. Gravatar of benjamin cole benjamin cole
    22. September 2014 at 05:15

    Scott: what about a payroll tax holiday finance by QE–that is to say, a payroll tax holiday financed by QE?

  10. Gravatar of ssumner ssumner
    22. September 2014 at 05:18

    Collin, You said:

    “Japan’s birth rate has been low since the 1970s so it is not the economic situation causing the low birth rate.”

    As I said.

    Ben, Just the QE, no need for a payroll tax cut.

  11. Gravatar of TallDave TallDave
    22. September 2014 at 05:24

    I think what people tend to miss is that whatever cultural or structural changes Japan needs, a better NGDP trend will help them get there faster. Certainly their present NGDP trend doesn’t maximize RGDP.

    Tyler Cowen asked me a couple years ago how well I thought Japan could do with better monetary policy. I said at the time that it seemed reasonable they could eventually reach United States levels of PPP GDP per capita, and I still think that’s true — and I think under NGDPLT that would be the new trendline.

  12. Gravatar of Candide III Candide III
    22. September 2014 at 05:53

    As far as I can see, all of this points to one simple and evident conclusion: that Japan needs deep seated cultural changes, especially ones directed to greater female empowerment and more open-ness towards immigration.

    I find it hilarious, in the sardonic sense, that people who question whether “it [is] really justified to run such a high risk, all-or-nothing experiment” as Abenomics “” which is, after all, a change in the economy “” should cavalierly propose such sweeping cultural changes, especially given the less than stellar track record of these sort of changes elsewhere.

  13. Gravatar of Steven Kopits Steven Kopits
    22. September 2014 at 06:04

    I am frankly confused.

    What is QE intended to accomplish? The Japanese economy is already at full employment, best I can tell.

    Is the intent of QE to lower interest rates to stimulate more investment? But aren’t interest rates in Japan already low? Who is Japan investing for? For domestic consumption? But at full employment, doesn’t higher consumption come from higher productivity? Is the argument then that QE is intended to increase the pace of technological change? Is that an appropriate goal for QE?

    Or alternatively, is then Japan investing for increased exports? But does it make sense for Japan to invest in exports at potentially negative interest rates? Shouldn’t the export market be able to produce a positive return on investment? I just don’t understand what problem we’re trying to solve.

    If it’s true there are monetary liquidity traps, it’s also true that there are fiscal liquidity traps, that is, levels beyond which govt debt-to-GDP ratios are hard to attain. Did no one in Japan’s govt think, gee, 200% debt to GDP could leave us in a real bind down road? But OK, why not print money to pay off the debt, Argentine style? Could it be because the Japanese themselves own most of that debt and therefore may resist their own expropriation through inflation?

    As far as it goes, I agree with dtoh. Japan’s problems are structural, and the country needs “a large reduction of taxes on capital, b) at will employment, and c) the ability to easily evict tenants or owners who are delinquent on their rent or mortgage.”

    I have no idea how much it would help growth, but if there are changes which could be beneficial, I think that’s where we should look.

    I am not at all convinced, by the way, that these would raise the birth rate to sustainable levels.

  14. Gravatar of Steven Kopits Steven Kopits
    22. September 2014 at 06:21

    Japan also has a 50% top income tax rate.

  15. Gravatar of Steven Kopits Steven Kopits
    22. September 2014 at 06:23

    And a 40% corporate rate, a 28% social security rate, and an 8% VAT (sales tax).

    And you wonder that growth is low?

  16. Gravatar of Vivian Darkbloom Vivian Darkbloom
    22. September 2014 at 06:27

    @Steve Kopits

    All great questions. And, the idea that the Japanese own their own debt has always been treated as an unmitigated advantage.

    You didn’t mention the valuation of the Yen. Hasn’t that depreciated significantly the past couple of years? Does that help stimulate exports even if productivity remains stable? As regards Japan being at full employment, that’s a good point, too. But, “full employment” isn’t the same as “full capacity”. As noted by JBH at Econbrowser (of course, you read that), does not increased capacity utilization translate into increased productivity even without technological improvement?

    Abenomics is not going to solve all Japan’s problems, but, will it help?

  17. Gravatar of ssumner ssumner
    22. September 2014 at 06:40

    TallDave, You can print jobs, but you can’t print productivity. No way does easy money cause Japanese productivity to rise to American levels.

    Candide, Great comment.

    Steven, I hope your comment is not directed at me, as the nutty views you are attacking are certainly not held by me. As far as my views are concerned, they are presented in this post and lots of others that are easily accessible by putting “Abe” in the search box.

  18. Gravatar of collin collin
    22. September 2014 at 07:14

    As I said.

    Ben, Just the QE, no need for a payroll tax cut.

    In general, all developmed,functional, competitive and productive nations have a low birth rates at this point. (Except Israel but other factors are there and at this point maybe oil rich Norway.) That includes Japan, Germany, Italy, Brazil, Chile, Australia, the US, Singapore, China, and Southern India. Because of higher birth rates, the long term French fiscal reality is better than Germany’s. So it does appear 0% economic growth is the future because (not in our lifetime) the population will stop growing.

    In fact, wouldn’t the cut in payroll tax help increase working class wages which would impact birth rates? QE has little impact on working classes.

  19. Gravatar of Steven Kopits Steven Kopits
    22. September 2014 at 07:21

    Not directed at you, Scott. But I don’t understand what monetary policy is intended to achieve in Japan. Ordinarily, I think of monetary policy as a kind of lubrication to assist an economy with sticky wages and prices to return to full employment. But if Japan is at full employment, what’s the objective?

    I think Viv above captures a number of my concerns. But take “full employment” vs “capacity utilitzation”. Why do I need low interest rates for increased capacity utilization? I don’t; it’s just operating optimization.

    When I was chairman of a printing packaging company in Hungary back in the early 1990s, I shepherded the transition from a socialist management structure to a capitalist one. In a period of a year (under a new CEO; nothing to do with me directly), we increased production by a factor of four, sales doubled and profits increased maybe fourfold. And we did it with the same old East German printing presses. Yes, we invested a bit, but nothing major.

    So why wouldn’t management take advantage of increasing capacity throughput if the opportunity’s there? Is it because of lifetime employment? Is so, we’re back to cultural and structural issues.

    So I’m still confused.

    As for criticism, you know I’m not shy about that. On the flip side, I thought your comments on the Gallup-Healthways Index were spot on. Panama? Is Panama really that good?

  20. Gravatar of dtoh dtoh
    22. September 2014 at 08:07

    Look at Japanese fertility rates relative to RGDP growth. The drop started exactly when trend RGDP growth dropped from around 8% to 4% beginning in 1974 and has continued to decline as RGDP growth continued to decline.

  21. Gravatar of dtoh dtoh
    22. September 2014 at 08:26

    Regarding tax rates, in addition to income taxes of 50% deductions (employer portion) for social insurance (workmen’s comp, social security, unemployment and health) are 15%. In addition, bonuses paid to Directors (i.e. profits paid to owners) are not deductible for corporate tax purposes, which means the effective tax rate is 79% (1 – (1 -.40)*(1 – .65). Assuming any kind of asymmetry in returns on capital (the government doesn’t cut you a check if you lose money) the effective expected tax rate is way over 100%.

    To say nothing of a 55% inheritance tax rate, an 8% consumption tax rate, $2/gallon gas tax, and a myriad of other taxes.

  22. Gravatar of dtoh dtoh
    22. September 2014 at 08:27

    And another thing on the fertility rates…. this is not rocket science. Just do the numbers, children are unaffordable in Japan unless you assume future income growth.

  23. Gravatar of dtoh dtoh
    22. September 2014 at 08:32

    Finally, regarding full employment and productivity growth in Japan. Anybody who has spent anytime in a Japanese office will know a la Steven Kopits Hungarian example, Japan is nowhere near it’s productivity potential.

  24. Gravatar of Steven Kopits Steven Kopits
    22. September 2014 at 08:49

    And finally:

    Japan real GDP growth for the last 20 years, per annum: 0.9%.

    Annual budget deficit, same period, as percent of GDP: -6.5%.

    Japan is being run like some sort of Keynesian banana republic. (Alas, so is the US.)

    But, the employed population is down by only 1 million since 2008 (64.1 to 63.3 m) and looks pretty stable. Population is also down 1 million during the same period. Unemployment is 3.7%.

    Median age is 45 and rising. Thus, contrary to Hugh’s assertion, I believe median wages should be increasing as the demographic curve moves towards peak earning years.

    According to the IMF, the output gap is only 1.4% of GDP.

    So what again is the problem monetary policy is trying to solve in Japan?

    Here’s what Japan needs to do. It’s straight-forward Thatcherite policy:

    – Reduce govt spending by 6% of GDP
    – Reduce top corporate and personal tax rates
    – Reduce the budget deficit to 1% of GDP or less (it would be nice to bring debt back to some long-term sustainable level)
    – Liberalize labor markets
    – Liberalize other markets

    The key challenge, I think, in Japan is to limit spending on the elderly. They will gut society’s finances if you’re not careful, because they will redirect resources from the young (investment) and working age (incentivizing current output) towards consumption (pensions and healthcare).

    Otherwise, there are no secrets in all this.

    But I would note, there are no painless solutions for Japan. You cannot run a huge deficit for a generation and expect that there will be no reckoning forever. Japan is a deficit junkie, and withdrawal will likely be unpleasant.

  25. Gravatar of Steven Kopits Steven Kopits
    22. September 2014 at 09:03

    dtoh –

    Regarding Japan’s productivity potential. I don’t know Japan, other than through some superficial survey of statistics. Do you think the IMF has miscalculated potential output?

    When I took a seat on the above-mentioned Hungarian company’s board, I ran a capacity calculation, bearing in mind that it was still with under socialist CEO and that system of management. I forget the exact number, but I think I calculated that we had maybe 30% spare capacity. It turns out we had about 300% spare capacity when operated under market conditions. I have been leery of capacity calculations ever since. In practice, I tend to find that businesses can find extra capacity in unexpected places.

    In any event, do you think the IMF is making the same mistake I did, ie, imputing too much importance to historically observed performance levels?

  26. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    22. September 2014 at 09:40

    If you were, as was I, unimpressed by the intellect of Thomas Piketty from reading him, wait until you hear him defend himself in this Russ Roberts podcast;

    http://files.libertyfund.org/econtalk/y2014/Pikettycapital.mp3

    Doesn’t get interesting until about 30 minutes in. (by ‘interesting’ I mean revealing of a very pedestrian mind)

  27. Gravatar of Maurizio Maurizio
    22. September 2014 at 10:45

    How fast do you expect Japan to grow? Negative growth will be the norm; zero growth is the new “economic miracle.”

    So , to sum up, we have to expect real growth to be zero or negative. On the other hand, I guess we have to expect money to keep increasing, presumably to avoid even lower growth. But what happens when money keeps increasing and stuff does not increase? Are you saying we have to expect inflation? (unless you argue that v is going to drop even more.)

  28. Gravatar of Vivian Darkbloom Vivian Darkbloom
    22. September 2014 at 11:19

    @Patrick Sullivan

    I’ve listened to that interview through the 13th minute. Piketty says. up to that point in the interview, that his study shows corporate executives are overpaid. He disagrees with the work of Kaplan et al on corporate executive compensation because the latter’s work covers only the top 5 executives based on SEC filings. Piketty says his study is better because many more of corporate executives than the top five reach the top 1 percent of earners and Piketty’s work is based on tax filings, so it captures more corporate executives.

    Maybe so, but I would be interested to know how, on the basis of aggregate information released under the IRS SOI, he (Piketty) can tell which of those in the top 1 percent of earners are actually corporate executives rather than something else. Can someone explain that one to me?

  29. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    22. September 2014 at 14:13

    Or why, still in the first 13 minutes, incentives are a stronger influence on executives bargaining behavior than they are for shareholders.

    But keep listening. You’ll hear more dubious theories proposed.

  30. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    22. September 2014 at 15:47

    My favorite bit from the Piketty podcast;

    ———quote———
    Russ: How do average people get wealthy or better off by rich people doing badly? What happened there? What’s the mechanism?

    Guest [Piketty]: Oh, you seem to ask me–[?] if you have a destruction of wealth, the rate of return to wealth is going to increase, and you know, this creates space for accumulation from people who start from less wealth or 0 wealth and that work[?] for labor incomes they can invest.
    ———–endquote—–

    Bastiat, call your office.

  31. Gravatar of benjamin cole benjamin cole
    22. September 2014 at 15:59

    Steven Kopits—I have run two small manufacturing businesses and been an employee in many others.
    You are right—businesses are flexible and can increase output.
    An oddity: At every business I was in, an increase in demand —more sales — resulted in greater efficiency, productivity and lower overhead unit costs.
    This is the opposite of economic models that assume businesses are at a low point in costs.

  32. Gravatar of dtoh dtoh
    22. September 2014 at 16:09

    Steve,
    Interesting question. There are really two key issues.

    1. Labor participation rate has dropped and a lot of workers are engaged in part time low productivity jobs. The number of young people living at home with part time jobs is astounding.

    2. Productivity is very low. Probably not as extreme as the Hungarian example you witnessed, but still very low. Doubling or tripling labor productivity in many sectors of the economy would be very doable.

    As you said, liberalizing key markets is an important issue. Particularly the labor market through at will employment. The risk of not being able to easily reduce your work force if things don’t go well is huge. Enforceable rent and mortgage contracts would also improve the real estate market making it much easier to obtain business premises… a key factor restricting business formation.

    Finally, tax rates are the most critical factor. There is zero incentive to start a business or improve productivity when the government is going to take a 100% or more of expected gains.

    I am less concerned about budget deficits. 5 to 10 years of good economic growth would eliminate the deficit.

    All that said, better monetary policy would help quite a bit. Monetary policy is only needed (and effective) when wages and prices are sticky (very true in Japan) and the prices of financial assets are not sticky. They key thing to remember is that low “official” unemployment is not the same thing as full employment.

  33. Gravatar of Scott Sumner Scott Sumner
    22. September 2014 at 17:03

    Steve, Monetary stimulus will reduce the debt/GDP ratio, which is needed. They are probably close to full employment, but not quite there. But debt is the big benefit. They’ve been lighting 10,000 yen bills on fire for 20 years with a policy that drove the equilibrium Wicksellian interest rate well below zero. That’s a stupid policy for a heavy borrower.

    dtoh, Yes, Japan can greatly improve productivity, but you do that with supply-side reforms, not printing money.

    If you can explain why fertility rates are just as low in other East Asian countries I might agree. But those countries are still doing well.

    Steven, Of course I agree on all the supply-side stuff. But don’t be lulled by the employment stability since 2008, employment is about to fall rapidly—it can’t really be avoided unless you get the very old to work much harder (and or the housewives.)

    Patrick, Piketty, has little or no understanding of the supply side of the economy–that’s by far the most disappointing part of the book.

  34. Gravatar of dtoh dtoh
    22. September 2014 at 18:43

    Scott,

    I agree, you increase productivity with supply side reforms, but you can still significantly increase employment/ hours worked with monetary.

    Fertility rates will obvious vary from country for a variety of reasons. But take a look at what happens to fertility rates across all the countries you cite around 2007 and then tell me RGDP growth rates don’t impact fertility rates.

    I think you’re disheartened a little bit by the results of monetary policy which has been less effective in Japan than you had hoped and therefore you are trying to blame it on socio-economic and supply side factors. Yes…. these are problems, but the primary reason monetary policy has not been effective is the hike in the consumption (and other) tax rates.

    Stop worrying, it will take a little longer, but Japan will prove you are a clairvoyant genius.

  35. Gravatar of TravisV TravisV
    22. September 2014 at 19:14

    Scott Grannis: “The return of King Dollar”

    http://scottgrannis.blogspot.com/2014/09/the-return-of-king-dollar.html

    What is the consensus Market Monetarist take on this topic?

  36. Gravatar of ssumner ssumner
    23. September 2014 at 05:01

    Dtoh, I agree that the recession reduced birth rates, but it’s not the main problem.

    “I might be convinced about growth if you could show me propserous East Asian countries with high birth rates.I think you’re disheartened a little bit by the results of monetary policy which has been less effective in Japan than you had hoped and therefore you are trying to blame it on socio-economic and supply side factors. Yes…. these are problems, but the primary reason monetary policy has not been effective is the hike in the consumption (and other) tax rates.
    Stop worrying, it will take a little longer, but Japan will prove you are a clairvoyant genius.”

    This is wrong, I should do a post to explain.

    Travis, I don’t focus on exchange rates for the US–i don’t think it’s a good indicator

  37. Gravatar of TravisV TravisV
    23. September 2014 at 07:34

    Prof. Sumner, thanks!

  38. Gravatar of TravisV TravisV
    23. September 2014 at 07:34

    Brad DeLong:

    “It Really Seems as Though Dallas Fed President Richard Fisher Doesn’t Want Real Wages to Increase, or Doesn’t Believe Real Wages Can Increase, or Something”

    http://equitablegrowth.org/2014/09/23/really-seems-though-dallas-fed-president-richard-fisher-doesnt-want-real-wages-increase-doesnt-believe-real-wages-can-increase-something-tuesday-focus-september-23-2014

  39. Gravatar of TravisV TravisV
    23. September 2014 at 07:39

    Arnold Kling notes this quote from Brad DeLong:

    “The Federal Reserve’s policy is data-dependent, but the data do not appear to include financial market forecasts and judgments.”

    http://equitablegrowth.org/2014/09/19/contractionary-federal-reserve-policies-2013-2014-friday-focus-september-19-2014

  40. Gravatar of Steven Kopits Steven Kopits
    23. September 2014 at 09:21

    Scott –

    If you need more inflation and want to reduce debt to GDP, why not just monetize the debt?

    Why all the contortions of QE when you can just print a few trillion yen and pay down the debt and create inflation? This is not hard: you just print yen until you see inflation pop up.

    On the other hand, this is likely to raise interest rates, and maybe cost your head if you’re Prime Minister. But I don’t see the point of pussyfooting around the issue. If you want inflation, make inflation. It’s not hard.

    On the other hand, if interest rates rise by 1% and debt is 250% of GDP (and assuming it all re-prices in some short time frame), then your debt service will go up by 2.5% of GDP in that same time frame, and poof, your fiscal policy is toast.

    You know, there is a chance that the Japanese actually owe that money, even if to themselves. And if they do, then it’s hard to see how Japan is not a banana republic. At some point, they will default on their debt by one means or another. If you wanted to pay down the debt in 50 years (that’s a long time!) to 50% of GDP, then you’d need a primary surplus of 4% or so, on average, throughout the business cycle. For 50 years. And their deficit is 6.5%? So you need to swing your national budget by 10% of GDP and have basically no room to increase revenues for decades? That implies a reduction in govt spending of about one-quarter. That’s a whole lot, perhaps even worse than Greece.

    Isn’t the starker reality that Japan can’t afford inflation? That meaningful, sustained inflation realized in interest rates is just about tantamount to default? That the reason that Japan can carry such an absurd debt load is that inflation and interest rates are pathetically low?

    It seems to me that Japan’s like Argentina, but with better PR. Much better PR.

  41. Gravatar of ssumner ssumner
    23. September 2014 at 09:38

    Steven, You don’t seem to be paying attention to what I’m saying. Japan has raised the rate of inflation, and interest rates have not risen at all.

    I’m not sure how many times I have to say that.

  42. Gravatar of TallDave TallDave
    23. September 2014 at 20:18

    TallDave, You can print jobs, but you can’t print productivity. No way does easy money cause Japanese productivity to rise to American levels.

    Not directly and not right away, obviously, but does better monetary policy make the probability higher that over a few decades Japan could catch up? Absolutely. Low growth has reinforcing feedbacks, as does higher growth.

  43. Gravatar of ssumner ssumner
    27. September 2014 at 08:14

    TallDave, Maybe, but I doubt it. Of course recent growth was affected by the tax increase, so we’ll need to wait a few years to see.

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