Reform as a macro policy lever.

Mark Crosby hrumphs about “Abenomics”.

I put “Abenomics” in quotation marks because it’s not really about the current policy direction in Japan —especially since it doesn’t the monetary policy aspects which are both the most interesting, novel and experimental part that warrants the new label. I could probably have put “Mark Crosby” in quotation marks, to the extent that the opinions are the expression of a global hrumphing id and is largely unrelated to the vessel through which it speaks.
The discussion about Japan’s economic doldrums highlights two great problems in macroeconomic discourse. The first is a lack of proper inference even when it is easy, and the latter is the weakness of discussing “reform” in macroeconomic circumstances.
Let’s consider how we can infer stuff about Japan’s economy. The population is aging, and there is a great deal in law and firm structure and culture that we would consider far from ideal. It’s natural to believe then, that combined these would puts constraints on economic growth.
But is this a binding constraint now? Unless you’re implying some kind of structural demand deficiency (which I suspect no-one is apart from MMTers), then the constraints that both demography and regulation/culture are imposing are supply side —Japan cannot produce more.  If this was so, and Japan is chasing the small pile of goods they can produce with too much money from huge deficits and low interest rates, what would we see?
High inflation. Of course.
What do we see?
The exact opposite.


In addition, a huge proportion of the population discouraged from labour market participation (especially women, the young and the old), who represent considerable spare capacity.
So whilst demography and reform/culture may set a cap on Japanese income that are lower than they could be, they’re clearly not at that cap now, else there would be inflation. To stress them now would be like a doctor seeing a patient with a broken leg and fretting about the patient’s weight. It may well be a problem, but it’s not the pressing one at hand. At least this is what the most elementary structrured inference tells us if we move beyond feelpinions.

That said, saying “reform” feels good, especially when one does not feel compelled to specify industries or laws. It’s also next to useless when talking about macroeconomics.
In part this is because it is focused on the sources of potential economic output. Macroeconomics is completely ignorant of these sources and, quite justifiably in my view, is much more concerned with deviations from that potential that cause ills such as inflation and the soul crushing misery of unemployment now being foisted on a generation of European youth.
Apart from some particularly egregious examples of economy wide bad policy, such as the old paper Raj in India, I don’t think we can ever relate a given economic reform to long term growth. They can only be evaluated in terms of a given industry or sector. If it works there, it was worthwhile. The impact on the macroeconomy is both unknowable and rather irrelevant.
I fear, however, that this unknowable aspect makes it very appealing to hrumphers. One can praise reforms such as Koizumi’s post office [1] privatisation whilst conditions seem to be improving, and then hrumph that there has not been enough when there is no lasting legacy on growth.
Crosby highlights this immaculately when he hrumphs about Europe’s lack of reform. After all, three years ago he highlighted Ireland’s history of reforms as a great success story of expansionary contractionary fiscal policy. Yet now of course we see Ireland imposing 27% unemployment on its youth (a figure diminished by emigration), a figure equal to France, one of the main poster children for Eurosclerotic resistance to reform, and many times that of Germany, the other poster child. The rigourously reforming Spain of the previous decade is now the Spain of 56% youth unemployment.
I guess they stopped reforming, and reform is needed in the slump much more than the boom. If, as our conventional economic analysis implies, there is a 1st best system of complete markets, then economic reform has finite implications for policy. We can pick low hanging fruit (like getting rid of the paper Raj) to rapidly move towards the frontier where policy is ideal, but further reform will always have diminishing returns and eventually the only reforms will be when technological change changes the ideal policy set up. It’s not an indefinite preposition.
Which means that if we accept reform as the vital cyclical management tool, we should conserve it for when we really need it. This has led us to a wonderful synthesis of Seriousness and unconsidered metaphors. The “reform, now more than ever” [2] can be merged with the “We need to keep our powder dry” crew of monetary policy. I hope the hrumphers will soon call for Australia to keep our reform powder dry for the end of the mining boom. Afterall, it’s the logical extension of their rhetoric.
[fn1] Effectively a savings bank
[fn2] Or whom Nicholas has termed the ““then was the time for complacency” crew”

About Richard Tsukamasa Green

Richard Tsukamasa Green is an economist. Public employment means he can't post on policy much anymore. Also found at @RHTGreen on twitter.
This entry was posted in Uncategorized. Bookmark the permalink.
Subscribe
Notify of
guest
12 Comments
Oldest
Newest Most Voted
Inline Feedbacks
View all comments
nottrampis
8 years ago

Mr Crosby was a great supporter of expansionary austerity.

I do remember saying to him why he didn’t take any notice of the IMF demolition of Alesina and Adargna. He hadn’t even heard the IMF had written it!

nottrampis
8 years ago

Mr Crosby does look a Goose both ex-ante and even bigger ex-poste.

Who is improving today the UK or the USA for example.

I was most amused how frequently he was asked to provide a single example of expansionary austerity yet each time he avoided the question.

He didn’t even understand the term Washington consensus!

nottrampis
8 years ago

richard,

He was wrong at the time as your link shows because he didn’t have a clue f what he was on about. He looks even worse now given we know the results.

A Certain BBB looks extremly prescient I might say immodestly

Tel
Tel
8 years ago

Young Japanese don’t buy government bonds, because they don’t see the point. “Abenomics” is not going to change this, and their government debt is not long-term sustainable unless something changes.

I recently bought a pair of Spanish made shoes (possibly slightly overpriced, but I’ve come to the conclusion that nice shoes give better career advancement opportunities that engineering skills) and the vendor told me that I wouldn’t have a second chance because the supplier hasn’t shipped any product for 8 months and those are the last of the line. He said he tried to buy more, and he thinks they are good quality (mine seem OK, I’m no expert) but they won’t ship product so he is forced to buy from someone else.

So they have high unemployment, but also the won’t work. Something is broken, right? I have some guesses but no explanation.

Cameron Murray
8 years ago
Reply to  Tel

“their government debt is not long-term sustainable unless something changes.”

I’d be interested in your definition of both long term and sustainable.

Tel
Tel
8 years ago

High inflation. Of course.
What do we see?
The exact opposite.

Sure, if you conveniently ignore goods imported into Japan: Puma shoes, Apple ipads, European fashion clothing, fuel of any sort. I presume we have one sort of inflation for economists and a different sort for Japanese people.

derrida derider
derrida derider
8 years ago

LOL, Tel – so are you saying that when the Australian dollar rose to parity with the $US the resulting fall in prices of imported “Puma shoes, Apple ipads, European fashion clothing, fuel ” etc meant that Australia experienced a massive deflation, despite what the CPI said?

Saying there is high inflation as import prices rise due to a weaker currency (an intended and highly beneficial feature of Abenomics, BTW) despite all non-traded good continuing to plummet at several per cent a year is just ridiculous. Especially in the case of Japan, when as we’ve all been pointing out for years they’ve not been importing enough.

Same with the “young Japanese don’t buy government bonds” stuff. Presumably that’s why price of ten-year Japanese government bonds have crashed to the horrendous depths of 88 cents – an implied interest rate of about 1%. Someone must be keen to buy those bonds at that terrific yield (well it is terrific compared with the deflation-driven alternatives). Looks like the market is really worried about the inflation risk – not.

Of course the real reason government bonds are not bought by young Japanese is not the the former are oversupplied but that the latter are undersupplied, which is the root of Japan’s longer run problems. Stuff about “cultural barriers to reform” etc is mostly just garbage.

murph the surf.
murph the surf.
8 years ago

Cultural barriers to reform – 2/3 of the Diet is ( or were) related by marriage.This leads to some abnormalities as does the inheriting of electorates.There is a core of the LDP – and the continued existence of this party in itself shows the slow pace of change – essentially funded by this industry group.
The influence of the construction and construction material supply companies has lead to the endless rounds of infrastructure building -highways to nowhere , except maybe handily to the airport with 6 flights a day.
Perhaps a greater cultural barrier to reform is the extreme reluctance to expand immigration into Japan.
The veneration ( or is it just an excuse ?) of the rice culture was typical of problems with agricultural market reforms also.
“We have longer small intestines so we can only eat japanese rice ”
etc etc – they are ingrained prejudices which are still significant.

nottrampis
8 years ago

This is in!!

Pedro
Pedro
8 years ago

Am I imagining it, or are you thinking that there cannot be problems on the supply-side along with the undoubted problems with AD? Do you also think that improvements in productivity on the supply side will have no impact on the economy. The lack of inflation is not evidence against supply-side problems in the japanese economy.

I also don’t know why you’d call Germany sclerotic on employment, unless you’ve not paid any attention to the very substantial reforms in that respect that were made when Germany was the sick man of Europe and which have seen a large gain in employment.

It is also crazy to suggest that the PIGS’s problems don’t have structural underpinnings to go with the monetary disaster that is the euro.

Homer, the problem with railing against expansionary austerity is that you are fighting on a battlefield that does not meaningfully exist. I think it’s pretty clear that pretty much nobody thinks that large slabs of austerity will quickly lead to a rebound from recession. But it is also clear that large slabs of austerity are not necessarily the evil that is claimed.

“Who is improving today the UK or the USA for example.”

Which of those two had the greatest amount of austerity?
Here is a hint.
http://thefaintofheart.wordpress.com/2013/05/21/monetary-policy-trumps-fiscal-policy-uk-vs-us/

nottrampis
8 years ago

Pedro , if you go to my EXCELLENT Around the Traps Francesc Saraseno makes the point the problem with europe at present is lack of demand not supply side failures!

You really need to read the mad Kates more often. of course Austerity advocates say it leads to economic expansion.

The UK has had more more austerity than the US