This is Part 2 of my blog posts on population shifts in Japan. In – What is the problem with rising dependency ratios in Japan – Part 1? (October 28, 2019) – we considered the evolution of dependency ratios in Japan as a precursor to considering the nature of problems that accompany a rising dependency ratio. The purpose is to disabuse the public debate of the idea that rising dependency ratios constitute a fiscal crisis and point to the increasing prospect of fiscal insolvency. That erroneous assertion has been used as one of the justifications for pursuing austerity policies, which damage growth, cause rising unemployment and generally miss the point. The problem with this construction is that the solution adopted by the ‘sound finance’ lobby (austerity) to their ‘non problem’ only serves to exacerbate the real problem. Today, we will consider the productivity challenge that lies at the heart of the issues a nation with a rising dependency ratio will face.
Later this week I will be in Japan for a series of presentations and meetings with a broad spectrum of Japanese politics. The various hosts of the events which I will confirm in Wednesday’s blog post are all committed to advancing an MMT understanding in Japan and ending the hold that ‘sound finance’ has on the public policy debates and regularly lead to poorly contrived policy shifts (such as the recent sales tax hike) in pursuit of lower fiscal deficits. As part of my preparation for my presentations I have been studying various aspects of the Japanese situation so that I can address the issues with a solid evidence base. One of the recurring themes put forward by the ‘sound finance’ lobby (which includes much of the economics profession both inside and outside of Japan) is that its ‘challenging’ demography demands that the Government move to surplus to ‘save up’ to avoid the impending fiscal disaster associated with a rising dependency ratio. This issue is not confined to Japan, of course. It is just that Japan’s demography is a little further down the ageing road than other nations. But while rising dependency ratios matter and need attention, the construction of the problem by the ‘sound finance’ lobby misses the point completely and their ‘solution’ to their ‘non problem’ only serves to exacerbate the real problem. That is what today’s blog post is about. In Part 2, I will elaborate more on the nature of the productivity challenge and some of the options that have been suggested to deal with it.
A little bit of a different blog post format today. I mentioned in this blog post – Apparently core MMT idea is now supported by the mainstream (October 16, 2019) – that the Japanese government had taken issued a statement, by way of a formal answer to a series of questions from Japanese CDR politician Kazuma Nakatani on the opening day of the new Parliament (October 4, 2019). The Japanese government reply was not available in full at the time I wrote that but it was reported in the Japanese Media that the Government response could be summarised as “As a government, we don’t implement policy based on the idea that Japan is a successful case of MMT because its inflation and interest rates are not rising despite massive debt … We are working to restore fiscal health”. Which I thought was an interesting way of trying to deny the undeniable but also missed the point somewhat – being that MMT is not a ‘case’ but rather just provides an alternative lens to understanding the way in which modern monetary systems operate, the capacities of the currency-issuing government within those monetary systems, and the consequences of particular policy choices. In that context, over the last 3 odd decades, the Japanese government has pushed policy into new domains – large-scale central bank government bond purchases with continuous, and, at times, relatively large fiscal deficits yet has seen interest rates fall to zero and below, inflation low to negative and negative long-term bond yields. The consequences of the policy choices have been anathema to those predicted by mainstream macroeconomists. Japan has essentially defied mainstream economics and demonstrated its falsities. The only body of macroeconomic thought that gets close to explaining the Japanese situation is Modern Monetary Theory (MMT). That is why our work is being discussed at the highest levels in Japan. Anyway, today, I can present full translations of the Questions and the Government response with my annotations of that response. My translation was considerably enhanced by Kobayashi Chie and I thank her heaps for her help.
It’s Wednesday and only a collection of snippets today. Today we saw some self-aggrandising hypocrisy with a short memory come out of the sewers, and a statement by a government denying that they are a “successful case of MMT”, an advertisement (call for help) and some music linked to a recent, rather significant death, when considered in the history of contemporary music. Pretty full day really.
In the last two days, some major leading indicators have been released for the US and Europe, which have suggested the world is heading rather quickly for recession. It seems that the disruptions to global trade arising from the tariff war is impacting on US export orders rather significantly. The so-called ISM New Export Orders Index fell by 2.3 percentage points in September to a low of 41 per cent. The ISM reported that “The index had its lowest reading since March 2009 (39.4 percent)”. This is the third consecutive monthly fall (down from 50 per cent in June 2019). Across the Atlantic, the latest PMI for Germany reveals a deepening recession in its manufacturing sector, now recording index point outcomes as low as the readings during the GFC. Again, exports are being hit by China’s slowdown. However, while export sectors (for example, manufacturing) are in decline and will need the trade dispute settled quickly if they are to recover, the services sector in Japan, demonstrates the advantages of maintaining fiscal support for domestic demand. Japan’s service sector is growing despite its manufacturing sector declining in the face of the global downturn. The lesson is that policy makers have to abandon their reliance on monetary policy and, instead, embrace a new era of fiscal dominance. With revenue declining from exports, growth will rely more on domestic demand. If manufacturing is in decline and that downturn reverberates through the industry structure, then domestic demand will falter unless fiscal stimulus is introduced. It is not rocket science.
Japan is about to walk the plank again when it follows through on a previous government decision to increase the consumption tax by a further 2 per cent on October 1, 2019. That means it rises from 8 per cent to 10 per cent. The latest fiscal documents suggest the government is hyper-sensitive to the historical experience, which tells us that each time they have fallen prey to the deficit terrorists who have bullied them into believing that their fiscal position is about to collapse, consumption expenditure falls sharply and the government has to respond by increasing the deficit even further to compensate. But, notwithstanding their caution (as evidenced by some permanent and temporary spending measures to offset the significant loss of non-government purchasing power that will follow the consumption tax hike, the fact remains that the policy shift will be undermine non-government spending and growth and is totally unnecessary. Moreover, the main problem in Japan at present is the lack of spending overall – non-government consumption expenditure has not yet recovered from the last consumption tax hike in April 2014. So far from raising taxes, the data on the ground is telling us that they should be increasing the fiscal deficit. This is another example of a few conservative politicians, being told by unaccountable mainstream economists to introduce policies that will damage the material prosperity of the ordinary Japanese worker and their families. And when we consider that the time is approaching when the debt-servicing burden for the government is approaching negative territory, then the consumption tax hike looks even more ridiculous.
It is my Wednesday blog post and my relative ‘blog day off’. But there has been an issue I want to write briefly about that has come up recently and has become a recurring theme. I am writing today to put the matter on the public record so that spurious claims that arise elsewhere have no traction. As our Modern Monetary Theory (MMT) work gains popularity, all manner of critics have started coming out of the woodwork. There is now, quite a diversity of these characters, reflecting both ends of the ideological spectrum and places in-between. The mainstream economists and those who profess to be ‘free marketeers’ bring out their big guns pretty quickly – inflation and socialism/Stalinism. Standard stuff that any progressive proposal to use government fiscal policy gets bombarded with since time immemorial. Easily dismissed. More recently, those who claim to be on the ‘progressive’ side of the debate have become more vociferous in their attacks, sensing, I suspect, that MMT have supplanted their relevance as the defenders of the anti-neoliberal wisdom. These characters resort to all sorts of snide-type attacks ranging from accusations of anti-Semitism (which I have covered previously), siding with Wall Street, ‘America-first corporatist sycophants’ (latest ridiculous book from G. Epstein as an example), giving succour to fascists and the Alt-Right, and that sort of stuff. Today, I want to address that last claim, which recently has been raised by a number of so-called progressive critics.
It is now clear that to most observers that the use of monetary policy to stimulate major changes in economic activity in either direction is fraught. Central bankers in many nations have been pulling all sorts of policy ‘rabbits’ out of the hat over the last decade or more and their targets have not moved as much or in many cases in the direction they had hoped. Not only has this shown up the lack of credibility of mainstream macroeconomics but it is now leading to a major shift in policy thinking, which will tear down the neoliberal shibboleths that the use of fiscal policy as a counter-stabilisation tool is undesirable and ineffective. In effect, there is a realignment going on between policy responsibility and democratic accountability, something that the neoliberal forces worked hard to breach by placing primary responsibility onto the decisions of unelected and unaccountable monetary policy committees. And this shift is bringing new players to the fore who are intent on denying that even fiscal policy can stave off major downturns in non-government spending. These sort of attacks from a mainstream are unsurprising given its credibility is in tatters. But they are also coming from the self-proclaimed Left, who seem opposed to a reliance on nation states, and in the British context, this debate is caught up in the Brexit matter, where the Europhile Left are pulling any argument they can write down quickly enough to try to prevent Britain leaving the EU, as it appears it now will (and that couldn’t come quickly enough).
It is Wednesday and a quite blog writing day for me. I have to catch a flight a bit later and finish some other things before I do that. But I receive a lot of E-mails from readers puzzled by the fact that the low-interest rate environment (even negative) has not stimulated economic activity to the point of accelerating inflation. As part of the paradigm shift that is now, finally, occurring in macroeconomic policy-making, the RBA governor Phillip Lowe continued his theme that monetary policy has basically exhausted its counter-stabilisation potential, when he made his – Remarks at Jackson Hole Symposium (August 25, 2019). He talked about the “the elevated expectations that monetary policy can deliver economic prosperity” against the reality that central banks do not have “the best lever” to manage the economy. This theme has been expressed by many central bankers now. And there is emerging research to show that the low-interest rate environment is actually achieving the opposite – reducing the inflationary pressures. This is no surprise to Modern Monetary Theory (MMT) economists. Our basic presumption is that monetary policy is an ineffective tool for modifying aggregate spending and that rising interest rates, which are designed to quell inflationary pressures, probably actually intensify those pressures through their impact on business costs. Today, I will briefly discuss a paper I read yesterday that adds to the growing research evidence on this theme.
This is Part 2 (and final) in my discussion about what the financial markets might learn from gaining a Modern Monetary Theory (MMT) understanding. I noted in Part 1 – that the motivation in writing this series was the increased interest being shown by some of the large financial sector entities (investment banks, sovereign funds, etc) in MMT, which is manifesting in the growing speaking invitations I am receiving. This development tells me that our work is gaining traction despite the visceral, knee-jerk attacks from the populist academic type economists (Krugman, Summers, Rogoff, and all the rest that have jumped on their bandwagon) who are trying to save their reputations as their message becomes increasingly vapid. While accepting these invitations raises issues about motivation – they want to make money, I want to educate – these groups are influential in a number of ways. They help to set the pattern of investment (both in real and financial terms), they hire graduates and can thus influence the type of standards deemed acceptable, and they influence government policy. Through education one hopes that these influences help turn the tide away from narrow ‘Gordon Gekko’ type behaviour towards advancing a dialogue and policy structure that improves general well-being. I also hope that it will further create dissonance in the academic sphere to highlight the poverty (fake knowledge) of the mainstream macroeconomic orthodoxy.