Jun 18 2019

Social Sciences

A big problem with Social Sciences is that the phenomena they want to describe are in many ways unique and unduplicateable. This is less true in History which purports to be the story of what is and one can, with a reasonable degree of confidence pick up an incised lump of dirt off the desert sands and say-

This is an Ur Cow Token!

In the others you find a lot of arguing over definitions and deep data analysis of limited samples of uncntrolled observation in search of patterns. Meh.

Now that Modern Monetary Theory has risen in prominence to a respectable level, Economists are looking for “natural experiments”, circumstances which demonstrate the effects of policies that only in some incomplete respects duplicate the models. As for instance Japan and MMT.

by L. Randall Wray, New Economic Perspectives
June 4, 2019

As MMT began to gather momentum, its developers began to receive a flood of calls from reporters around the world enquiring whether Japan serves as the premier example of a country that follows MMT policy recommendations.

My answer is always the same: No. Japan is the perfect case to demonstrate that all of mainstream theory and policy is wrong. And that it is the best example of a country that always chooses the anti-MMT policy response to every ill that ails the country.

Reporters find that shocking. Biggest government fiscal deficits in the developed country world? Check. Highest government debt ratios in the developed country world? Check.

Isn’t that what MMT advises? No.

Nay, it is the perfect demonstration that all the mainstream bogeymen are false: big deficits cause inflation? No. Japan’s inflation runs just above zero.

Big debts cause high interest rates? No. Japan’s policy rate is about -0.10 (negative rates).

Big debts cause bond vigilante strikes? No. Japan’s government debt is hoovered up as fast as it can be issued. (All the more true with the BOJ running QE and creating a “scarcity” in spite of the quadrillions of yen debt available.)

Critics of MMT counter that Japan is “proof” that big deficits kill investment and growth.

Well, it is true that Japan has been growing at just 1% per year—certainly nothing to write home about. However, investment grows at about a 2% pace, but is pulled down by lack of consumption growth—which has averaged just about zero over the past few years.

Yet, unemployment clocks in at only 3% – in spite of slow growth — as the labor force shrinks due to an aging population. Per capita GDP has been stuck at about $38,000 for years (not so bad, but not growing). And Japan’s current account surplus has surged from under 1% to 4% of GDP over the past few years (considered to be good by most commentators).

From the MMT perspective, what Japan needs is a good fiscal stimulus, albeit one that is targeted. Japan has three “injections” into the economy: the fiscal deficit (which has fallen from 7% of GDP to about 5% over the past few years—still a substantial injection), the current account surplus, and private investment. But what it needs is stronger growth of domestic consumer demand—which would also stimulate investment directed to home consumption. So fiscal policy ought to be targeted to spending that would increase economic security of Japanese households to the point that they’d increase consumer spending.

So what is Prime Minister Abe’s announced plan? To raise the sales tax to squelch consumption and reduce economic growth.

You cannot make this up.

This has been Japan’s policy for a whole generation. Any time it looks like the economy might break out of its long-term stagnation, policy makers impose austerity in an attempt to reduce the fiscal deficit—and thereby throw the economy back into its permanent recession.

Clearly, this is the precise opposite to the MMT recommendation. And yet pundits proclaim Japan has been following MMT policy all these years.

Why? Because Japan has run big fiscal deficits. As if MMT’s policy goal is big government deficits and debt ratios.

No. We see the budget as a tool to pursue the public interest—things like full employment, inclusive and sustainable growth. To be sure, by many reasonable measures Japan does OK in spite of policy mistakes. Certainly in comparison to the USA, Japan looks pretty good: good and accessible healthcare, low infant mortality, long lifespans, low measured unemployment, and much less inequality and poverty. But Japan could do better if it actually did adopt the MMT view that the budgetary outcome by itself is not an important issue.

But, no, the Japanese officials are falling all over themselves to make it clear that they will never adopt MMT. Finance Minister Taro Aso called MMT “an extreme idea and dangerous as it would weaken fiscal discipline”.

One wonders how a reporter could listen to that without bursting out in laughter. Japan’s “fiscal discipline” would be threatened by MMT? The debt ratio is already approaching 250%! By conventional measures, Japan has the worst fiscal discipline the world has ever seen!

But, wait, it gets even funnier. “BOJ policy board member Yutaka Harada kept up the attack on MMT. The approach proposed by MMT will ‘cause [runaway] inflation for sure’. “

Assume the economy is at Point A—for Japan this would represent a 5% deficit ratio and a 1% rate of growth. Now PM Abe imposes a consumption tax, or the USA plummets into a downturn, reducing Japan’s growth rate. The economy moves up and to the left toward Point B as growth slows and the deficit ratio rises.

Slower growth reduces tax revenue even as it scares households and firms, which reduce spending in an effort to build up savings. The slower growth also reduces imports so the current account “improves” somewhat. From the sectoral balance perspective, the government’s balance moves further into deficit (to, say, a 7% fiscal deficit), the current account surplus rises (say from 4 to 5%) and the private sector’s surplus grows to 12% (the sum of the other two balances).

That’s the ugly way to increase a fiscal deficit. It is the Japanese way. It is like a perpetual bleeding of the patient in the hope that further blood loss will cure her ills.

What is the MMT alternative? Measured and targeted stimulus designed to restore confidence of firms and households. Ramp up the Social Security safety net to assure the Japanese people that they will be taken care of in their old age. Recreate a commitment to secure jobs and decent pay. Either promote births or encourage immigration to replace the declining workforce. Undertake a Green New Deal to transition to a carbon-free future.

In that case we move along the curve from Point A toward Point C. The fiscal deficit increases in the “good” way, while growth improves.

Note, however, that the boost to the deficit will only be temporary. Households and firms will begin to spend and their surplus will fall. The current account surplus will fall, too, as imports rise. Tax revenues will increase—not because rates rise but because income increases. The fiscal deficit will fall as the domestic private surpluses decline. Precisely how much the deficit will fall depends on the movement of the private surplus and current account surplus — with the deficit falling to equality with the sum.