Will Abenomics work? Wrong question

Abenomics is often described as having three arrows:

1.  Monetary stimulus

2.  Fiscal stimulus

3.  Structural reform

There’s no point in even discussing fiscal stimulus, as they just increased their sales tax by 300 basis points.  Another 200 basis point rise is coming in a few years. There isn’t going to be any meaningful fiscal stimulus.  Structural reform may or may not occur in Abe’s second term—we’ll have to wait and see.  So for now, it’s all about monetary stimulus.

There are two reasons not to ask how Abenomics is doing.  It’s not clear what Abenomics is, and it’s not clear what it is trying to achieve.  So let’s simplify things and ask how the monetary stimulus arrow is doing.  Now we have only one unknown; what is monetary stimulus trying to achieve?

Monetary stimulus is not trying to achieve a higher trend rate of real GDP growth. Monetary policy can’t do that.  Structural reform might be able to boost RGDP growth over time, but the reforms haven’t yet been enacted.  If we are talking about monetary stimulus, then it makes more sense to consider these three goals:

a.  Economic recovery—reducing unemployment to roughly the natural rate

b.  A 2% inflation target

c.  An improved fiscal situation

The unemployment rate has fallen during the period of Abenomics—which ironically began even before he was elected in early 2013.  The yen started falling in the forex markets in late 2012, as soon as Abe announced his platform (he was widely expected to win easily.)  Lower unemployment is a plus.  How about the fiscal situation?

Here’s the Financial Times:

Since becoming prime minister a little more than two years ago, Shinzo Abe has forced the central bank to adopt more radical yen-weakening policies to spur inflation while allowing the first rise in consumption tax since 1997.

Such measures are aimed at containing the government’s vast debts, which have swelled to more than twice the size of the economy amid rapidly rising payments for health and social security.

Abenomics has improved Japan’s fiscal situation. A combination of higher corporate profits and the 3 percentage-point consumption tax increase last April seems set to push tax receipts to a 22-year high in the next fiscal year.

This puts the government on course to meet a pledge to halve the gap between what it spends (excluding debt-service costs) and what it collects in tax, as a percentage of gross domestic product.

The finance ministry wants to eliminate that deficit altogether by 2020 “” a commitment likely to require big cuts in social security spending, as well as another 2 percentage point increase in consumption tax in April 2017.

So they are on course to improve their fiscal situation.  Another plus.

As I expected, they are falling short on their 2% inflation goal (although Japan is at least out of deflation).  It remains to be seen whether the BOJ will persevere until they hit the 2% inflation target.

Of the three goals mentioned above, the 2% inflation target is the least important.  So the monetary stimulus is a modest success.  Why then is Abenomics often viewed as having failed?  Because monetary stimulus is only one of the three arrows.  Yes, it can do everything that fiscal stimulus could have done (if tried), but it can’t raise the trend rate of RGDP growth in Japan.  Because Japan’s working age population is falling at 1.5%/year, trend RGDP growth is roughly zero. Many people look to RGDP growth when judging the performance of an economy, and by that criterion Abenomics has failed.

As the post title implies, it makes no sense to ask how Abenomics is doing.  That mixes up unrelated issues, such as policies enacted that may or may not have worked, and policies that were not enacted for political reasons.  As an analogy, one of my commenters recently mixed up two types of monetary policy impotence; inability of the central bank to boost AD, and inability of more AD to boost RGDP.  It’s important to always be very clear on which problem you are analyzing.

To summarize, Abe’s nominal policies have improved things, and the supply-side (structural) policies were never tried.

PS.  Simon Wren-Lewis responded to my recent Econlog post.  In the comment section over at Econlog, Rajat anticipated what I would have said:

Wren-Lewis has responded: http://mainlymacro.blogspot.com.au/2015/01/faith-based-macroeconomics.html

Most of it seems besides the point. I’m not sure what levels of government consumption and investment imply about ‘austerity’, which presumably also captures cuts to transfer payments and tax increases.

I pointed out that the “year of austerity” in the US began on January 1st, 2013, and hence that you would want to look at Q4 over Q4 figures growth figures.  He responds with government output data.  Very convenient, given that the austerity that began on January 1st took the form of increases in both income and payroll tax rates.  Sequester came later in the year, and even that included cuts in transfers (which are not output).  Wren-Lewis never even addressed my other two criticisms.

Wren Lewis also implies that I believe that “fiscal policy never matters much.”  I actually believe that demand-side fiscal policy doesn’t matter much when a country has an independent monetary policy and targets an aggregate like inflation or NGDP.  I thought that was the standard view in macroeconomics.  (Now Wren-Lewis calls it “faith based”.)  But even then, supply-side fiscal policy like employer-side payroll tax cuts (advocated by Christy Romer and me) and VAT cuts can be effective.

Marcus Nunes also has a good post.



31 Responses to “Will Abenomics work? Wrong question”

  1. Gravatar of foosion foosion
    10. January 2015 at 15:00

    Fiscal policy: would a fair summary of your view be that monetary policy can override fiscal policy, but holding monetary policy constant, fiscal policy (even on the demand side) can be effective.

  2. Gravatar of foosion foosion
    10. January 2015 at 15:05

    Regarding Krugman and Wren-Lewis, see Robert Waldman’s reply to my question http://delong.typepad.com/sdj/2015/01/over-at-equitable-growth-yes-the-past-four-years-are-powerful-evidence-for-the-keynesian-view-of-what-happens-at-the-zero-l.html

  3. Gravatar of Daniel Daniel
    10. January 2015 at 15:07

    Serious question – why are people paying attention to Wren-Lewis ?

    Everything I’ve read from him is obfuscatory nonsense.

  4. Gravatar of CMA CMA
    10. January 2015 at 16:04

    Would it be true that if MP targets inflation FP can affect NGDP or vice versa?

  5. Gravatar of Ashton Ashton
    10. January 2015 at 16:12

    Unrelated question, Scott, but I wondered if you have any opinions or comments regarding Bernanke’s ‘Global Savings Glut’ hypothesis?

  6. Gravatar of Don Geddis Don Geddis
    10. January 2015 at 17:19

    @foosion: “holding monetary policy constant” Is that a meaningful phrase? Can you define it precisely?

    Monetary policy (generally) is a feedback control system. Like cruise control in a car. The road may have slight hills and valleys, but the cruise control adjusts the throttle to maintain constant speed.

    You ask whether demand-side fiscal policy can be effective. Do slight hills exert any pressure on a powerful car? (Yes.) Are hills effective at changing the speed of a car under cruise control? (No.)

    What does it mean to “hold the cruise control constant”? Do you mean to ask it to exert the same commands to the throttle, that it would have exerted under the counterfactual that the hill had not been there? But no feedback control system (such as monetary policy) works like that.

  7. Gravatar of benjamin cole benjamin cole
    10. January 2015 at 17:19

    Excellent blogging. I have a friendly disagreement with Scott Sumner that Japan can only tread water in terms of real economic growth. Strong demand for labor could alter the rate of growth or shrinkage in the Japanese labor force, while encouraging productivity growth too.
    I hope the BoJ pours it on.
    Side note: The Shanghai Stock Exchange composite index is up about 60 percent in the last 6 months. Huh?

  8. Gravatar of Negation of Ideology Negation of Ideology
    10. January 2015 at 18:13

    “Monetary stimulus is not trying to achieve a higher trend rate of real GDP growth. Monetary policy can’t do that.”

    I understand that’s the conventional view, but I’m not so certain. It seems to me good monetary policy over an extended period of time could improve real growth. Or more precisely, bad monetary policy could permanently reduce real growth. For example, when workers are involuntarily unemployed for extended periods their productivity can be harmed. Also, monetary shocks can cause productive investments to be liquidated that wouldn’t have been under stable monetary conditions. Long term planning of individuals and businesses could suffer under an unstable monetary regime.

    I’m not arguing that structural reform is unimportant for real growth, just that monetary policy is also important. You could say that a nation’s currency is a part of the structure of the economy.

    Perhaps implementing your monetary regime could lift our long term growth rate.

  9. Gravatar of Peter K. Peter K.
    10. January 2015 at 19:04

    I’m just an amateur but it seems to me for the anti-Keynesians, the problem isn’t economists like Krugman, Baker, Wren-Lewis, or Waldmann, but big institutions like the CBO, OECD, IMF and Federal Reserve.

    Here’s Stanley Fischer, Vice-Chair of the Fed and former central banker of Israel, this past August:

    “The stance of U.S. fiscal policy in recent years constituted a significant drag on growth as the large budget deficit was reduced. Historically, fiscal policy has been a support during both recessions and recoveries. In part, this reflects the operation of automatic stabilizers, such as declines in tax revenues and increases in unemployment benefits, that tend to accompany a downturn in activity. In addition, discretionary fiscal policy actions typically boost growth in the years just after a recession. In the U.S., as well as in other countries–especially in Europe–fiscal policy was typically expansionary during the recent recession and early in the recovery, but discretionary fiscal policy shifted relatively fast from expansionary to contractionary as the recovery progressed. In the United States, at the federal level, the end of the payroll tax cut, the sequestration, the squeeze on discretionary spending from budget caps, and the declines in defense spending have all curtailed economic growth. Last year, for example, the Congressional Budget Office estimated that fiscal headwinds slowed the pace of real GDP growth in 2013 by about 1-1/2 percentage points relative to what it would have been otherwise. Moreover, state and local governments, facing balanced budget requirements, have responded to the large and sustained decline in their revenues owing to the deep recession and slow recovery by reducing their purchases of real goods and services. Job cuts at federal, state, and local governments have reduced payrolls by almost 3/4 of a million workers, resulting in a decline in total government civilian employment of 3-1/4 percent since its peak in early 2009. The fiscal adjustments of the last few years have reduced the federal government deficit to an expected level of 3 percent of GDP in 2014 and fiscal drag over the next few years is likely to be relatively low. ”


    Now Sumner may be right that the Fed *can* compensate for this fiscal drag. But as Fischer points out, the Fed has to make an effort to compensate. It has to do more work to compensate.

  10. Gravatar of chris mahoney chris mahoney
    10. January 2015 at 20:27

    BoJ does not have control over money growth, for whatever reason:

  11. Gravatar of Ray Lopez Ray Lopez
    10. January 2015 at 20:32

    Typical Sumner double-speak, misdirection, ignorance and outright lying. This from the man who accused me in another thread of being like a drunk in a bar when I spoke of “long-TERM AS/AD” instead of “long-RUN AS/AD” (Sumner, pedantically, said there’s no such thing as the former). Sumner: “There are two reasons not to ask how Abenomics is doing. It’s not clear what Abenomics is, and it’s not clear what it is trying to achieve.” – only TWO reasons? And it’s not clear what Abenomics is, despite correctly defining it according to the three-arrows model in the preceding paragraph? Typical Sumner strawman parsing and doublespeak.

    “Monetary stimulus is not trying to achieve a higher trend rate of real GDP growth. Monetary policy can’t do that.” – Monetary policy is not about trying to achieve a manned mission on Mars either, so? But actually, many people would say indeed raising nominal GDP will, short term, also raise real GDP growth (I’m not one of those people, but many people would agree with this statement). So Sumner is wrong, because monetary stimulus *IS* about *TRYING* to do just that, even if it will fail.

    Next Sumner talks about how great Japan’s fiscal situation is, with increased revenue coming in, but aside from the gated FT article I could not find any evidence of this, but to the contrary, Japan is slipping back into recession: “http://www.livetradingnews.com/japan-continues-print-money-89301.htm”

    Finally, Sumner gets into what he really wants to discuss, his long-winded “P.S.”, taking issue with Simon Wren-Lewis, who correctly debunks Sumner on austerity. Sumner: “I pointed out that the “year of austerity” in the US began on January 1st, 2013, and hence that you would want to look at Q4 over Q4 figures growth figures. He responds with government output data”. HAHAHA! Are you kidding me Sumner? What other criteria do you expect for government austerity EXCEPT government output data? And austerity began on Jan 2013? Ludicrous. First, that’s the very definition of austerity, government output. Second, austerity began well before 2013. Here’s a graph and article by Kevin Drum that shows that Wren-Lewis is 100% correct on this issue and Sumner is 100% wrong: http://www.motherjones.com/kevin-drum/2015/01/non-chart-day-wheres-austerity (graph shows austerity started in 2010 not 2013, and indeed, austerity by the US govt historically is much worse now than ever before). Sumner’s attempt to ‘parse’ the truth by playing with words does not work when you are dealing with fellow economists; it only works vs hapless captive students and commentators on your (for now) unmoderated blog. BTW I don’t believe austerity is bad, but clearly Simon Wren-Lewis is right and Sumner is wrong on the facts in dispute.

  12. Gravatar of Nick Nick
    11. January 2015 at 05:48

    @ Ben Cole
    There’s a bit of a ‘bubble’ going on in Shanghai A shares following a couple of new avenues opening for foreign capital to own those shares. I put bubble in quotes bc I have no way of knowing what the relative value of owning some of these financial corps A shares over B shares would be if and when things go south in their credit market. I don’t think theres an optimistic way to justify this gap. And I really don’t know what downside protection A shares would actually offer. But I’ve met many people suspicious of Chinese A/B share structure, even though there’s obviously no shelter from political risk investing in China regardless of what you own.

  13. Gravatar of Brian Donohue Brian Donohue
    11. January 2015 at 06:53

    Good post Scott. Why is Tyler Cowen so heavily invested in Japan is doomed narratives?

  14. Gravatar of ssumner ssumner
    11. January 2015 at 09:17

    foosion, If you mean a fixed money supply or fixed interest rate, then yes, if you are holding monetary policy constant by holding expected inflation or NGDP growth constant (as Bernanke and I prefer), then no.

    CMA, Some types of fiscal policy can, but not things like tax rebates or transfer payments. And even more government output can only boost RGDP in very restrictive cases (like wasteful military spending that makes people work harder to maintain their consumption.)

    Ashton, Yes, I think that’s part of it. Lower investment demand due to falling population growth is another.

    Ben, I certainly agree the BOJ needs to do more, but I expect more benefits on the fiscal debt side than the real GDP side.

    Negation, I should not have been so categorical, there can be second order effects, as you say. David Glasner has good posts on that topic. But I would not expect much in a country with 3.5% unemployment, down from 5.5% a few years ago.

    Peter, That does not explain why RGDP growth nearly doubled in 2013. Yes, it’s possible the effects are not fully offset by monetary policy, but that’s the baseline assumption we should have in starting our analysis.

    Ray, You said:

    “This from the man who accused me in another thread of being like a drunk in a bar when I spoke of “long-TERM AS/AD” instead of “long-RUN AS/AD””

    Nice try, but you can’t fix a total lack of understanding by shifting words around. It’s still gibberish.

    You said I describe the Japanese fiscal situation as “great.” I think it is lousy, where did you see the term “great?”

    On austerity your real debate is with Keynesians like Paul Krugman and Mike Konczal. In early 2013 they told me that 2013 was the year of austerity, it wasn’t my idea. Then when things didn’t go their way Keynesians started saying “what austerity.”

    I think the entire “austerity” concept is nonsense, so I let the Keynesians define it.

    Brian, Japan does have big long term debt problems, but Abenomics is improving things at the margin.

  15. Gravatar of Ray Lopez Ray Lopez
    11. January 2015 at 09:38

    @Sumner – you may be right that there’s no such thing as long-term AS/AD or long-run AS/AD. But every Econ101 book contradicts you… As for Krugman’s austerity argument, I do understand your point of view after reading a bit more…seems indeed Krugman misspoke, you pounced on it, then Krugman, like the great Keynes, changed his mind (“When the facts change, I change my mind. What do you do Sir?”), but you insist on carrying on with a strawman argument on Krugman’s old views. Fact is: 2013 was not the year of austerity, even Krugman will concede that. But Post 2010 was and is austerity: the US government has spent less, proportionately, than in other post-recessions. That’s a fact. And developing countries have spent more with governments than developed countries, and have grown faster post-recession. Inconvenient facts, not strawmen.

  16. Gravatar of James in London James in London
    11. January 2015 at 10:52

    Simon Wren-Lewis is a top macroeconomics professor at a global top 10 university. He represents elite monetary economist thinking. In fact, he sympathises with NGDP Targeting. He prefers fiscal demand side policy, and that is the real debate here. I suspect he doesn’t much care for supply-side economics. In this he is also quite mainstream, sadly.

    To his immense credit, he has joined the blogosphere. He finds it a bit rough, but he has also recognised it is the cutting edge these days. Remember, PK partly got his Nobel Prize for blogging. Keynes got his way partly due to his highly active public writing and campaigning.

    Academic economists who remain in academia only are going to be passed by, just like so many old (real) economy dinosaurs like Kodak or telephone landlines or physical cash.

  17. Gravatar of Don Geddis Don Geddis
    11. January 2015 at 10:58

    @Ray Lopez: “there’s no such thing as long-term AS/AD or long-run AS/AD. But every Econ101 book contradicts you” References please. Specific books, specific page numbers.

    Recall also that you’re trying to explain this statement of yours: “monetary policy can affect long-term AD/AS-simply not true” Would love to see you dig down into the details and explain this off-hand claim of yours.

  18. Gravatar of James in London James in London
    11. January 2015 at 11:02

    FWIW, I have challenged S W-L to explain whether he approves of an independent, inflation targeting central bank – one that necessarily offsets fiscal demand side expansion. He just gets cross. He never says what he’d replace it with, just reasserts that someone should tell them not to offset. He ends up musing dreamily about benevolent dictatorships. Very British (I say, as a Brit).

    He also has a bizarre blind spot that means he keeps asserting monetary policy cannot work at the ZLB. As if he doesn’t want it to work as it would mean he has to bring in rational expectations into his model. Or, if it has worked, then it would have been so much better with added fiscal demand side expansion. He’s hard to pin down.

  19. Gravatar of TravisV TravisV
    11. January 2015 at 11:10

    Greg Mankiw: “The New Economics of the Left”


  20. Gravatar of Daniel Daniel
    11. January 2015 at 12:28


    If Wren-Lewis represents “elite monetary economist thinking”, then truly the profession is in a very sad state.

  21. Gravatar of Tray Dopez Tray Dopez
    11. January 2015 at 19:48

    @Don Geddis – keyword search “short-run” and “long-run” at AD-AS model in Wikipedia http://en.wikipedia.org/wiki/AD%E2%80%93AS_model Are you really this ignorant? BTW it seems Sumner is blocking Ray Lopez hence the new name–like it?

  22. Gravatar of Philippe Philippe
    11. January 2015 at 20:05


    my understanding is that Simon WR is orthodox, and his understanding of orthodox economics is that ‘at the zlb’ monetary policy is wholly dependent on uncertain expectations whereas fiscal policy is always effective in that context.

  23. Gravatar of ssumner ssumner
    11. January 2015 at 20:13

    Ray, Your arguments are increasing charming. Krugman “misspoke”; even if there had been a Great Depression II in 2013, Krugman would have said in 2014, “I was wrong, there was no austerity at all in 2013. My mistake. And the Great Depression II shows Keynesianism is wrong. Sumner is right.” Yup, no doubt about that.

    Tray, Why would I block my favorite commenter? And today we can add paranoia to his many appealing qualities. Like Captain Queeg in The Caine Mutiny, he has enemies everywhere, trying to block his brilliant comments from showing up at moneyillusion. But I’ll work as hard as I can to make sure he isn’t blocked, his wisdom needs to be heard by all of us.

    Let me know when you’ve figured out what the long run AS/AD is all about.

  24. Gravatar of Philippe Philippe
    11. January 2015 at 20:18

    *Simon WL

  25. Gravatar of Daniel Daniel
    11. January 2015 at 22:39


    my understanding is that Simon WR is orthodox

    My point exactly. If that what is where macro orthodoxy is at this moment, then macro is in a very sorry state.

  26. Gravatar of Philippe Philippe
    11. January 2015 at 22:45

    as far as I can tell, you seem to agree that monetary policy ‘at the zlb’ is about expectations.. does that mean you don’t believe in the effectiveness of the ‘hot potato effect’?

  27. Gravatar of Daniel Daniel
    12. January 2015 at 01:45

    I’m not particularly interested in splitting hairs (expectations/hot potato/etc).

    What I do know is that the zero-lower-bound is only a mental block.

    And such mental blocks is what an economics education should prevent – yet obviously doesn’t.

  28. Gravatar of Daniel Daniel
    12. January 2015 at 01:51

    What does it say about the economics profession when so much energy is wasted developing models around a superstition ?

  29. Gravatar of Brian Donohue Brian Donohue
    12. January 2015 at 06:56

    Scott, LOL.

    “Ahh, but the strawberries that’s… that’s where I had them. They laughed at me and made jokes but I proved beyond the shadow of a doubt and with… geometric logic… that a duplicate key to the wardroom icebox DID exist, and I’d have produced that key if they hadn’t of pulled the Caine out of action.”

  30. Gravatar of Charlie Jamieson Charlie Jamieson
    12. January 2015 at 10:27

    I’m confused as to the idea that monetary policy can’t boost RGDP growth. I thought the whole idea behind spurring inflation and NGDP growth was that this would spur RGDP.

  31. Gravatar of ssumner ssumner
    13. January 2015 at 07:47

    Philippe, It’s always about expectations (zero bound or not.) It’s about expectations of the HPE.

    Brian, When I picture Ray in my mind’s eye I visualize Bogart.

    Charlie, I can only affect RGDP in a cyclical sense, it can’t affect trend RGDP.

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