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.
³ Effectively a savings bank
⁴ Or whom Nicholas has termed the ““then was the time for complacency” crew”

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