Abe reasons from a price change

Here’s the FT:

Shinzo Abe has demanded Japanese companies lift pay by three per cent next year as he uses his big victory in last week’s election to intensify his push to boost the country’s economy.

The Japanese prime minister’s decision to give a specific number marks a deepening of government interference in private sector wage settlements. Last year, Mr Abe simply called for pay rises at least as great as the year before.

Would higher wages be good for the Japanese economy?  It depends.  If the higher wages are achieved through more aggregate demand, then they might be associated with higher employment.  If implemented via less aggregate supply (as Abe proposes), they will lower employment.

Consider the following two options:

If the BOJ adopts an expansionary monetary policy, boosting NGDP, then the demand for labor will increase.  This will boost growth, increase wages, and employment will rise to point B.

If the BOJ does not boost NGDP but Abe pressures firms into raises wages anyway, then employment will decline to point C.

It’s very demoralizing that top officials in Japan the US and Europe continue to make the EC101 error of reasoning from a price change.  Over and over again.

Why do we even bother teaching EC101 in colleges?  What’s the point?

PS.  Now that taxes are in the news let me agree with Jeff Flake, who is calling for tax reform, not tax cuts.

Tax reform would be one of the very best things the GOP could do right now.  Tax cuts would be among the very worst moves they could make.

It’s often said that the modern GOP exists for one purpose only, to enact tax cuts.  I don’t think people have fully internalized the implication of that truth.  If and when the GOP does enact tax cuts and/or reform, it will no longer have a reason to exist.  Tax reform might end up being a major achievement, or it might not.  But either way the enactment of a major tax bill will mark the end of the modern GOP.  They will no longer have a reason to exist.

I have no idea what will take it’s place.  Perhaps a white nationalist Bannonite party.  National socialists.  But whatever it is, it won’t be the modern GOP—which will be dead.

PPS.  On the graph, I forget to label points B and C as a 3% wage gain.



23 Responses to “Abe reasons from a price change”

  1. Gravatar of IVV IVV
    26. October 2017 at 10:36

    “If the BOJ adopts an expansionary monetary policy, boosting NGDP, then the demand for labor will increase.”

    Is that necessarily true? Couldn’t it be possible that injecting money into the economy could, in essence, simply incent owners of production to raise prices and not invest in labor?

    I keep feeling like this will not result in a greater demand for labor, just a greater demand for ROI.

  2. Gravatar of ssumner ssumner
    26. October 2017 at 10:43

    IVV, There will generally be some increase in the demand for labor, as higher prices would boost the MRP of labor.

    How much demand increases depends on lots of factors. It’s certainly possible that prices will rise by more than wages.

  3. Gravatar of Randomize Randomize
    26. October 2017 at 10:43

    Dr. Sumner,

    Do you have any insight into why the 1993 Taylor Rule gets all the press rather than his 1999 update? Has he disavowed the 1999 version or something?

    Looking at the results, the 1993 version fails the reasonable test for navigating the Great Recession and meeting the 2% inflation target while the 1999 version looks more in line with what would have really been required to attain the target. I ask because the media gets wrapped up in Taylor being relatively “hawkish” regarding today’s fed funds rate when, based on the 1999 rule, the opposite might be true.


  4. Gravatar of mpowell mpowell
    26. October 2017 at 11:04

    I feel like this analysis by Scott is somewhat naive. Abe is making a public statement. He is not necessarily interpreting a hoped for price change as an indication of underlying economic conditions. Maybe he is making this statement as a way of setting or influencing expectations? Monetary policy is not just about concrete steps right?

  5. Gravatar of Cameron Blank Cameron Blank
    26. October 2017 at 12:09


    This makes sense to me, but why do smart people like Paul Krugman disagree with you? I know their basic argument, but have they ever directly addressed your (more sensible as far as I’m concerned) perspective?

  6. Gravatar of IVV IVV
    26. October 2017 at 12:10

    Thanks, that makes sense.

    I always think that the goal of such exercises is to increase contentment (and thereby increase favorable votes) for the wage-earning classes. Then, I imagine that contentment, assuming that the volume of product available in Japan remains the same one year to the next, is best measured by the portion of product consumed/claimed by wage earners.

    So what would be the best way to ensure that wage earners increase their relative consumption?

    (Yes, in an environment with a growing basket of goods available to a country, the absolute consumption can increase while the relative consumption decreases, and that can raise contentment regardless. But I’m operating under the idea that Japan doesn’t have that, or else demands for wage increases wouldn’t need to be made.)

  7. Gravatar of H_WASSHOI H_WASSHOI
    26. October 2017 at 13:29

    Abe’s brain knows those Econ101.

    I understand Abe-san is doing simply political action.
    (Main left supporter is labor unions )

  8. Gravatar of Lorenzo from Oz Lorenzo from Oz
    26. October 2017 at 13:38

    I am not sure either US political Party has a single reason to exist. They are both mechanisms for building electoral coalitions. They have managed to continue to exist even as they swap geographical strongholds.

  9. Gravatar of dtoh dtoh
    26. October 2017 at 14:23

    Abe has been saying this for a long time, and I have commented before.

    The only reason you need monetary policy is because of sticky wages and prices. Without sticky wages and prices, monetary policy would be both unnecessary and ineffective.

    An expansionary monetary policy essentially unsticks (decreases) real wages and prices allowing employment and AD to increase.

    “Re-sticking” wages by trying to jawbone big companies into higher wage increases completely undermines the fundamental reason for implementing Abenomic monetary policy in the first place.

    It’s beyond idiotic and demonstrates that Abe has no idea what he’s doing. Fortunately, it’s unlikely to be completely successful.

  10. Gravatar of Benjamin Cole Benjamin Cole
    26. October 2017 at 16:19

    Theoretically, Scott Sumner is correct,

    But Shinzo Abe is Japanese and understands what goes on in Japan.

    Japan is Japan, with large structural and institutional imperfections, and powerful cultural norms.

    One strong cultural norm especially in Japan Inc., is lifetime loyalty to a single employer.

    Ponder that norm, and wages. If an employer knows you will not leave….

    Side note: New Zealand is banning foreign purchase of existing homes.

    Thus joining Australia and Canada is raising legal and tax bars on foreign ownership of homes.

    This problem of exploding housing costs in nations running large current account trade deficits is getting worse. Property zoning is upending theoretical gains from free trade and immigration.

    Hong Kong now has the world’s least affordable housing in relation to incomes. The former crown colony’s free market sector is reduced to not building rabbi hutches, but rather hamster huts for its citizens.

    “Nano flats” with 194 square feet! Ah, the wonders of free trade and free enterprise!


  11. Gravatar of Major-freedom Major-freedom
    26. October 2017 at 20:31


  12. Gravatar of ssumner ssumner
    26. October 2017 at 20:45

    Randomize, I don’t know.

    Powell, He is putting pressure on companies.

    Cameron, I think he assumes that higher inflation will boost velocity. But that’s only true of demand side inflation.

    Wasshoi, That’s possible.

    Lorenzo, I think the Dems have a pretty significant agenda.

    dtoh, You said:

    “Fortunately, it’s unlikely to be completely successful.”

    I agree.

    Ben, Still don’t know that HK has a CA surplus? How many times do you have to be told?

  13. Gravatar of Benjamin Cole Benjamin Cole
    27. October 2017 at 02:51


    Re Hong Kong:


  14. Gravatar of sean sean
    27. October 2017 at 09:51

    Long-time daily reader. Love your content.

    Here is a problem I see with tax reform. If you lower rates and take away deductions etc; then when a democrat comes into office they can hike taxes and you are out of ways to shield income.

    I believe in tax reform (And lower taxes). But its complicated and a system that lacks trust.

    I agree now is not the time to cut taxes. we should be running easier monetary policy and trying to cut the deficit with spending cuts.

    I’ve developed one belief of late contrary to prior beliefs. I think long-term we are going towards a guaranteed minimum income because of technology. In terms of taxes I think the upper class wage earners (non billionaires) pay very high rates. If we really wanted to raise revenue we need to hike the taxes on the middle, but that goes against where I think things are headed longer term.

  15. Gravatar of Michael Rulle Michael Rulle
    27. October 2017 at 10:06

    We don’t know yet what the tax bill will be, or even if there will be a tax bill. While I have found the current antics of the GOP self destructive, each party goes thru these phases.

    Lets assume you are right that taxes are the only thing the GOP cares about—itself a rather silly view—but lets go with it. Then suppose they pass a tax bill that is beneficial rather than hodge podge. You then say—they will then have no purpose to be? How many times have we seen tax laws change in the last 20 or 80 years? Too many to count.

    So even under your premise, we will always need a GOP.

    Of course, we may not need them for other reasons—-just not that one.

  16. Gravatar of Scott Sumner Scott Sumner
    27. October 2017 at 10:53

    Sean , Don’t do good policies because later someone else might do bad policies?
    I hate that sort of argument. If you are right then there is no hope for our society. Why not just have everyone commit suicide?

    If the Dems are determined to raise taxes, they’ll do so regardless of what the GOP does right now.

    Michael, So after waiting like 60 years for the GOP to take control of all branches of government they produce a tax reform this winter, and then run in the 2018 midterm elections on the issue of the need for another tax reform?


  17. Gravatar of Mikio Mikio
    27. October 2017 at 17:49


    I believe Abe’s action is political. He demands the Keidanren (business federation) to play ball to help him counter the claim the widespread claim that Abenomics is increasingly inequality (becuase presumably inflation is reducing people’s real incomes, and tax hikes are bad as base pay is stagnant).

    Besides, companies in Japan pay discretionary summer and winter bonusses and can control the total pay. But a „3% increase in base pay” makes for very good headlines that the average Japanese can understand as proof that nominal incomes are rising in general. It’s a gimmick, since total wages (including bonuses) have been rising anyway probably by more than 3% already. Voters don’t understand 2% inflation. They think that’s a pay cut. People understand 3% base wage hike.

    But, I agree. If the BOJ doesn’t ease – it won’t make things easier.



  18. Gravatar of Mikio Mikio
    27. October 2017 at 18:04

    And Keidanren finally played ball right after the election: announcing it would ask members to raise base pay by 3%.


    That’s more than the Rengo Labor Union federation had asked for (2%) shortly before the election. The Rengo is the main voting machine of the opposition CDP/DP:


    It’s politics. Abe is trying to get the message “wages are rising for everyone” accross. And this will work in Japan. People don’t understand or like the 2% inflation goal, and many ridicule the NGDP target of 600 trillion JPY by 2020.

  19. Gravatar of Mark Mark
    27. October 2017 at 21:43

    “But either way the enactment of a major tax bill will mark the end of the modern GOP. They will no longer have a reason to exist.”

    Scott, maybe I missed an amendment, but will the GOP’s tax bill reduce all tax rates to 0?

    I think there’s some validity to your sentiment, that once a politician or party ‘solves’ the problem that is their raison d’etre, they render themselves redundant, but this tax bill isn’t a total victory. Arguably, (if we pretend the the GOP in congress is still the same old GOP of old, ideologically) until we have just a night watchman state (plus some anti-porn laws), the GOP still has a reason to exist

  20. Gravatar of ssumner ssumner
    27. October 2017 at 21:48

    Mikio, Thanks for that information.

    Mark, No, because the GOP does not favor small government. They have no intention of reducing government spending at all. Not in the slightest. This will soon become apparent to everyone.

    When they pass tax reform, they will take ownership of the tax system, in all its perversity.

  21. Gravatar of TravisV TravisV
    28. October 2017 at 07:48

    “Trump Leans Toward Powell for Fed With Announcement Next Week”


  22. Gravatar of foosion foosion
    28. October 2017 at 08:47

    “It’s often said that the modern GOP exists for one purpose only, to enact tax cuts.”

    More precisely, it exists to cut taxes on its donor class and otherwise to transfer resources towards the donor class (directly, through regulatory changes, etc).

    What’s left after a big tax cut? Another big tax cut of course.

  23. Gravatar of Benjamin Cole Benjamin Cole
    29. October 2017 at 03:52

    So, please tell me again, who are the “nuts,” who are the very serious people, and who are the good guys in D.C.?

    “WSJ Editorial Board Calls on Robert Mueller to Resign from Russia Probe

    by ADAM SHAW26 Oct 20174,941
    The Wall Street Journal’s editorial board called Thursday for FBI Special Counsel Robert Mueller to step down from his role in investigating alleged Russian interference in the 2016 election, saying that he lacks the “critical distance” to analyze recent revelations about the FBI’s role in the saga.”


    The Wall Street Journal editorial page a generation ago traded credibility for expediency…but this seems to mark yet another new low.

    WSJ in bed with Trumpistas?

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