Bad advice from the Financial Times

The Financial Times is hardly alone in misdiagnosing Japan’s problems, but I can’t resist commenting on this misguided advice from the Editorial Board:

Yet it is still puzzling that such an extreme monetary policy, which has seen the assets of the BoJ rise to an extraordinary level of 100 per cent of gross domestic product, has had so limited an effect on inflation. One reason is that it has not led to overheating of the economy. Another is that the exchange rate against the US dollar has actually appreciated since 2015. A still more important reason must be that inflation expectations became so stubbornly anchored at close to zero. . . .

At the same time, it [the BOJ] will probably need more help from the government. The proposed increase in the consumption tax in October of next year needs to be abandoned until the inflation target is reached. Indeed, the idea that the best target for increased taxation is consumption makes no sense in a country with such exceptionally low shares of consumption in GDP. It would be far better to tax something else, such as undistributed and uninvested profits. It is also possible that explicit resort to “helicopter money” will be required. The aim now should not just be for the BoJ to keep carrying on, but for the government to co-operate fully with it, to lift Japan out of its deflation trap.

“Extreme monetary policies” are exactly what you get when a contractionary monetary policy drives NGDP growth over several decades to the lowest rate ever seen in any country in modern history.  It’s not “puzzling” that this policy is associated with low inflation.

The proposed solutions are exactly backwards.  Japan should increase its consumption tax next year because it needs the revenue and this is one of the most efficient of all taxes.  Or perhaps I should say the least bad tax.  Of course if they wish to cut spending instead, that would be fine.  But there’s almost no chance of that occurring, and a tax increase is less bad than an exploding debt.  A helicopter drop is just more fiscal stimulus, piled onto a public debt that is already roughly 250% of GDP.  Taxes on capital income are much less efficient that consumption taxes, and Japan’s consumption is not an “exceptionally low share” of GDP:

Screen Shot 2018-12-17 at 11.51.45 AMThe BOJ should instead adopt a more expansionary monetary policy combined with fiscal austerity.  There are many options, including NGDP level targeting.  As for the policy instrument, I suggest either exchange rate targeting, or a “do whatever it takes” approach to QE.  So far, the BOJ has refrained from either approach.  If the BOJ prefers a smaller balance sheet, then they should set a higher NGDP (or inflation) target.  And by all means, shift from growth rate targeting to level targeting.

Of course the “concrete steppes” crowd will whine “but they’ve already done so much . . . ”  Nonsense.  As Yoda said:

Do. Or do not. There is no try.

Off topic, Trump believes that Fed decisions on the proper level of IOR should be determined by car bombings in Paris:

“It is incredible that with a very strong dollar and virtually no inflation, the outside world blowing up around us, Paris is burning and China way down, the Fed is even considering yet another interest rate hike. Take the Victory!,” he said in a tweet just a day before the start of the final Fed policy meeting of the year.

America cities were burning in 1967 and 1968.  And what happened to inflation?

(And please don’t comment on whether it makes sense for the Fed to raise interest rates. Leave that for another post.)



21 Responses to “Bad advice from the Financial Times”

  1. Gravatar of Marcus Nunes Marcus Nunes
    17. December 2018 at 11:16

    Old, but relevant:

  2. Gravatar of LK Beland LK Beland
    17. December 2018 at 11:28

    I don’t get conventional thinking among Japan commentators. They somehow converged to this idea that Abenomics failed.

    In my view Abenomics was essentially:
    -More expansionary monetary policy
    -An increase in VAT

    The results (since 2012):
    -Per capita GDP PPP increased almost 7%
    -Unemployment: Decreased from 4.5 to 2.4% (!!!)
    -Prime-age employment rate: Increased from 80.5% to 85.4% (!!!)
    -NGDP growth rate is at its highest in decades
    -There’s slight inflation, rather than deflation
    -Government deficit decreased from 8.1% to 4.5%

    These are spectacular results! Scott Sumner is right, they should do more of it (Easier monetary policy + VAT increase).

  3. Gravatar of Christian List Christian List
    17. December 2018 at 12:19


    wouldn’t a carbon tax be even more effective?

  4. Gravatar of ssumner ssumner
    17. December 2018 at 16:23

    Thanks Marcus.

    LK, Good post. And yes, do enough to hit the target.

    Christian, About equally effective.

  5. Gravatar of Michael Sandifer Michael Sandifer
    17. December 2018 at 16:29


    Do you think monetary policy’s beginning to get too tight? I’ve see both active and passive tightening by the Fed in recent months.

  6. Gravatar of Benjamin Cole Benjamin Cole
    17. December 2018 at 16:55

    I would keep an open mind to helicopter drops, a.k.a. money financed fiscal programs.

    In 2003, Ben Bernanke visited Japan and suggested money financed fiscal programs.

    Japan dodged the Great Depression under finance minister Korekiyo Takahashi, by using money financed fiscal programs. It was the only developed economy in the world to grow in the 1930s.

    I still genuflect to the QE totem. I salute NGDPLT.

    But egads, sometimes you just have to say, “Praise NGDPLT and pass the ammo (money financed fiscal programs).”

  7. Gravatar of Kgaard Kgaard
    17. December 2018 at 18:41

    Why raise the VAT at all? If they did sufficient QE to hit the 2% CPI target they would have LOADS of tax revenues no? The deficit would evaporate.

    The VAT tax just suppresses economic activity by driving a deeper wedge between producers and consumers no?

    If VAT taxes are so great why do they seem to cause recessions wherever they are raised (most recently Sri Lanka)?

  8. Gravatar of Todd Kreider Todd Kreider
    17. December 2018 at 21:44

    But at the end of the day, since 2000, 18 years, Japan’s GDP per capita has grown at 0.9% a year on average and the U.S has grown 1.0% a year per capita.

    Apparently the inflation rate isn’t important. (But we knew that)

  9. Gravatar of Todd Kreider Todd Kreider
    17. December 2018 at 21:49

    Oops, typo: not 0.9% but 0.8%. Still, quite close to the U.S. for almost two decades despite very different inflation rates.

  10. Gravatar of ssumner ssumner
    17. December 2018 at 21:55

    Michael, Hard to say. It’s clear that it’s roughly appropriate, but I can’t say more than that.

    Kgaard, The previous VAT increase in Japan worked well, so do it again!

    If they get enough growth to solve their deficit problem they can always cut back on the VAT later, but don’t hold your breath.

    Todd, No one ever claimed that inflation matters for long run growth, but it matters for other things. I’ve done lots of posts on why it matters.

  11. Gravatar of Benjamin Cole Benjamin Cole
    18. December 2018 at 04:51


    Paul Volcker, the “nationalist”?

  12. Gravatar of Michael Sandifer Michael Sandifer
    18. December 2018 at 07:15

    I don’t think there’s any doubt monetary policy’s tightened recently. Credit spreads are growing, the yield curve is flattening, etc. At the very least, there’s passive tightening, as the Fed isn’t doing enough to offset the actions of “Tariff Man”.

    It’s not so bad from the perspective of the 2% inflation target, but we know that regime is sub-optimal.

  13. Gravatar of LK Beland LK Beland
    18. December 2018 at 08:45

    In regards to stance of monetary policy in the US:

    1- 5-year breakeven inflation is close to its post-recession average.

    2- Nominal total weekly earnings in the private sector (i.e. weekly wages x total private payroll employment) are growing at their average post-recession rate. This a good proxy for the stance of monetary policy c.f. the labor market. Ideally, we’d like to have a forward looking indicator of it, but we don’t.

    3- The hypermind ngdp growth forecast for Q4 2018 is roughly 4.5%. That’s above the post-recession average.

    Taking those three indicators into account, I’d conclude that current Fed policy is about as expansionary as its post-recession average. It might even be slightly more accommodating than its post-recession average.

  14. Gravatar of LK Beland LK Beland
    18. December 2018 at 08:54

    One last point about Fed policy:

    4- Unemployment claims are extremely low. That’s another sign that monetary policy is providing enough oxygen to the labor market.

  15. Gravatar of Cloud Cloud
    18. December 2018 at 09:14

    Your advice of expansionary monetary policy plus fiscal austerity sound to me quite Fiscal Theory of Price level!!

  16. Gravatar of ssumner ssumner
    18. December 2018 at 11:40

    Michael, You don’t understand. Trump insists that tariffs help the US economy grow faster. They are a reason to raise rates. 🙂

    Cloud, Only a coincidence.

  17. Gravatar of Christian List Christian List
    18. December 2018 at 12:06

    Christian, About equally effective.

    Scott, thank you for your answer.

    I thought that you would say it was more effective because it might be the best tax against climate change.

  18. Gravatar of Todd Kreider Todd Kreider
    18. December 2018 at 12:58

    ” No one ever claimed that inflation matters for long run growth, but it matters for other things. I’ve done lots of posts on why it matters.”

    Japanese unemployment remained low from 2000 to 2018, and its peak was briefly 5.5% before steadily falling. Why does it matter that Japan’s inflation hovered around 0% for much of that time? Not a full post – but a sentence would be helpful.

    I’m not sure why you say Japan as an exploding debt when it hasn’t increased as a percentage of GDP in years or why you discuss gross debt instead of net debt. (Gross debt increase has been almost flat for the past five years and net debt has been flat for eight years.

  19. Gravatar of ssumner ssumner
    19. December 2018 at 17:51

    Todd, Zero inflation makes the public debt problem worse. Yes, the ratio leveled off recently due to the VAT increase that many of my opponents opposed, and I favored.

  20. Gravatar of Todd Kreider Todd Kreider
    19. December 2018 at 20:57

    Actually, the leveling off happened before 2014.

  21. Gravatar of ssumner ssumner
    20. December 2018 at 12:40

    Todd, Actually, it didn’t:

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