Recent Posts

Wednesday, October 30, 2019

Quick Comment On Takeda Article

Masahiko Takeda wrote an article "Will Japan’s consumption tax hike fix its fiscal woes?" (h/t Tom Hickey at Mike Norman Economics). I just wanted to comment on some statements about Modern Monetary Theory (MMT), as well as fiscal sustainability, and "independent fiscal institutions."

This is the comment that catches MMTers' eyes:
Influential pundits have argued that under the current situation there is no need for the government to worry about fiscal sustainability. They have found support in the proponents of so-called modern monetary theory, who have cited Japan as real-world proof of their heterodox doctrine. Even some mainstream economists, including Olivier Blanchard, have advocated for fiscal activism in Japan and argued against the consumption tax hike. An important basis of their argument is the absence of inflation and the resulting very low interest rates. Still, most mainstream academic economists in Japan are undaunted, sticking to their guns of prudent fiscal management.
The annoying thing about this passage is the framing: that not listening to MMTers is "prudent."

Japan has negative interest rates. Every extra yen of debt that they issue implies greater "interest income". In what sense does attempting to lower debt levels imply "prudence"?

To be clear - Takeda does a good extremely brief summary of the part of the MMT position. Japan has no inflation problem. Fiscal policy is obviously not causing an overheating of the economy. I am not a Japanese voter, and have no idea whether their government spending is properly allocated or not; that is the concern of Japanese citizens and politicians.

To use a popular MMT framing: it is not a government debt, it is a private sector (technically, non-central government) financial asset. Japan does not have a government debt problem, it has a problem with the private sector owning too much government bonds. Given Japan's wealth and demographic position, is it surprising that the private sector owns a lot of government bonds? What policies can the government impose to reduce private sector wealth that will be politically sustainable?

We Don't Know What Fiscal Policy is Doing, But We Need Experts To Tell Us This

The parts of the Takeda article that raises my eyebrows are the following bits of text. The first statements are ones I wholeheartedly agree with.
Unfortunately, discussions of sustainability, including fiscal sustainability, are intrinsically vague because they involve the future. Since the ability to forecast economic conditions over the medium to long term is woefully weak, it is impossible to settle the debate one way or the other. Without taking sides, however, there remain proposals which should receive no objections from both sides.
However, later in the article, we see:
It was reported in 2015 that a group of parliamentarians across the aisle were planning to propose a law to establish an IFI [Independent Fiscal Institution, like the CBO in the United States] in the Diet. There has been no follow-up report on this since. It may have fizzled out. This initiative should be revived so that all parliamentarians, and Japanese citizens in general, can have access to reliable and impartial information about where Japan’s public finances stand and where it is going.
That is, we do not know exactly what is happening with fiscal policy because the future is inherently uncertain, yet we need to enshrine a group of unaccountable technocrats in a position where they have a de facto veto over elected politicians -- because of their knowledge of how fiscal policy works?

I am a believer that fiscal policy is dominant, and its analysis ought to be taken seriously. However, the proper place for the government to do that is having faceless mandarins puttering away in the Ministry of Finance  (or equivalent) -- and they are accountable to an elected politician, and they can be overruled. (Obviously, senior bureaucrats are not powerless, and can help dampen mistakes made by rookie politicians out of the public eye.)

Any bureaucratic organisation is going to be taken over by a clique of like-minded people, and they will crush out dissent. No matter what the intentions of founders, any IFI will end up being a mindless reactionary organisation within a generation. Fiscal policy cannot be completely separated from political economy, and needs to be undertaken in organisations that are not a protected monopoly: in political parties, think tanks, and possibly even some academics might have something useful to add. The point is that these other organisations will rise and fall based on their relevance to society. If one wishes, they have to sell their goods in the marketplace of ideas.

(c) Brian Romanchuk 2019


  1. What's your overall take on Japan's "lost decades?"
    I think Richard Koo's balance sheet recession theory (that fiscal needs to offset private sector savings) to be well argued but it's been decades now of low growth and flat CPI. What's going on? Zombie corporations? Demographics?

    1. There was an obvious malaise in the years after the bubble bust. I started covering Japan around 2001, and so that was the story then, and it fit the facts.

      Right now, demographics and the trend to outsource manufacturing seems to explain what appear to be low growth rates. On a per capita basis, I don’t see Japan as doing particularly badly. They have managed to achieve price level stability (based on the CPI index that I use), which is actually what a lot of policymakers wanted before the “2% inflation target” fad took hold. In other words, I don’t buy the alarmism that we still see in commentary.

      My lack of knowledge of Japanese means that I am hardly an expert, so I avoid trying to pretend that I’m one. But my feeling is that Japanese officials are playing along with narrative we see in the English language financial media and in technocratic analysis as it gives them an excuse to follow policies they were going to do anyway.

  2. You write " What policies can the government impose to reduce private sector wealth that will be politically sustainable?".

    Quite an interesting question! Is wealth improved with possessing more fiat debt and money?

    Let's look at adding a new government program. Should the new program increase the amount of resources commanded by government or leave the private-public resource allocation the same?

    If the allocation was to remain the same, the existing government financial inflow would need to be redeployed to take on the new task. This could be done in two ways: (1) Existing employees redeployed. (2) New resources taken from the private sector could be paid for with consumption reductions taken from existing government employees.

    Not hard to see who would oppose method (2)! Still, some lucky private workers might welcome the shift.

    A decision to increase the allocation of resources in favor of government control implies a reduction of control by the private sector. Taxes on the private sector could be increased, or government could undertake to annually fund with borrowed money. Either way could fund the new program. Either way would increase the portion of resources controlled by government.

    For the government to borrow money repeatedly, on a sustainable basis, some portion of the economy would need to repeatedly accept a growing debt total. Whether growing debt was accompanied by growing amounts of money would depend upon whether the entity accepting debt was private or bank. (Am I right--bank borrowing always results in an increase in the amount of money on deposit in accounts?)

    In closing, I think that we have found the answer to your question. If we assume that a loss of resource control is a reduction of wealth, then a politically sustainable way to reduce private sector wealth is to increase debt.


Note: Posts are manually moderated, with a varying delay. Some disappear.

The comment section here is largely dead. My Substack or Twitter are better places to have a conversation.

Given that this is largely a backup way to reach me, I am going to reject posts that annoy me. Please post lengthy essays elsewhere.