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March 12, 2012

[SSJ: 7280] Re: Why Noda is pushing for a tax increase

From: Smitka, Mike
Date: 2012/03/12

Ron Dore:
> that it its Minister of Finance and its
representative on whatever
> Japan's public sector salaary commission is called,
will call for a
> rise in all public salaries of 5% and will expect the
inflation rate
> to rise to 5% eventually, would meet only cynicism?
In a world in

Conceptually there are many varieties of fiscal policy that would overcome the deflationary momentum in Japan.
Ron Dore provides one such suggestion -- bumping salaries leads to higher fiscal expenditures. Of course in the public sector teachers loom large (surely the largest single public sector group); and even if the
K-12 end outnumbers us professors, we'd benefit from that as well. I would argue that would be a far better investment in the future than extending the various under-utilized regional shinkansen (which the "ketchi"
mindset in MOF insist should be financed by bonds and then have fares set to pay off those bonds, guaranteeing that getting to and from Japan's regions remains unnecessarily expensive). So good fiscal policy.

Now bond vigilantes and traditional fiscal conservatives and those whose power comes from controlling budgets oppose this. No need for me to add more there, given past and ongoing discussions on the list.

As to central banks, we economists know that there is only one thing that they can do reliably, which is to fight inflation. In a deflationary or deeply recessionary environment (the US, the EU, Japan) we know that monetary policy is impotent to boost growth.
That pervades the entire central banking mindset: fight inflation. Otherwise central banks are irrelevant. (The economics literature on central banking and monetary policy reflects the same bias: study the effectiveness of fighting inflation.)

mike smitka

Addenda #1: Now I've left out the central bank lender of last resort function. There's tension there with the inflation fighting mission, and there's tension with political acceptability. There's also the moral hazard argument, that promising bailouts to banks in trouble encourages banks to take risks because it removes the downside. I'm skeptical of that argument, because I don't see lots of senior bankers being separated from the fortunes they made by placing bets that later failed to pan out. They still have the incentive to adopt high-risk strategies, because they win big when the bets pay off, and don't lose when the bets fail.
Indeed, the riskier the gamble, the bigger the potential upside.

Addenda #2: Of course we've a whole crew of money & banking economists who insist that monetary policy has simply not been aggressive enough. Given multiple attempts at QE in different economies, that fails the laugh test. It does however come out of the models and methodologies used in the profession. Except for a group of those who thought hard about Japan's case, there was no perception that the zero lower bound on interest rates was worth thinking about, and it is hard to incorporate asymmetry into either statistical tests or formal models. You probably don't want to know what a VAR (vector auto regression) is, but that was the core empirical method, and it suffers very much from that symmetry defect. On the theory end, the "in" thing in macro during the Great Moderation was DSGE models (again, don't ask). Those too had a high degree of symmetry, and furthermore were "solved" by converging to a long-run steady-state that meant that every action had an offsetting reaction (because the point to which everything moves didn't change). Very elegant, technically very challenging, and hence very good for turning out a PhD because there are lots of things to tweak -- and very divorced from reality, even by the standards of economic models. Those models are also very "simpatico" for those with conservative impulses, because activist policy tends to accomplish nothing.
Again if you were a US economist (or German / French / UK economist -- that is, the bulk of the profession in training if not nationality) who ignored various and all-too-frequent crises in the other world (again, training and data were both parochial), there wasn't much to suggest these models were so flawed as to be uninteresting (because they more-or-less ruled out business cycles), and anyway with time they'd become sophisticated enough to address "real world" issues, should any ever arise. (Crises? What does the US economy have in common with Thailand? And area studies did all too good a job of preaching that Japan Inc is sui generis and thus can be ignored.)

Approved by ssjmod at 11:51 AM