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March 28, 2012

[SSJ: 7318] Re: Why Noda is pushing for a tax increase

From: Smitka, Mike
Date: 2012/03/28

To Ron Dore with a nod to Rick Katz:

1. I'm not sure that the capital goods story works so well -- manufacturing is a much smaller share of the Japanese economy. Now if one includes mansion and office buildings as capital goods, then there's more wiggle room. The big swings ca. the Lehman Shock were inventories, not capital goods.

2. It really doesn't matter that the BOJ gets \1 trillion of JGBs in terms of the economic impact. Since under Ron Dore's scenario they're not "in the market"
shifting the supply and demand for bonds, then the fact that the BOJ would indeed buy bonds doesn't affect anything. Now the question is what people & firms do when they receive the \1 trillion. Is there some sort of multiplier effect, or do we have only the normal direct impact of government expenditures? The answer at the moment is the latter, because nominal interest rates are already zero.

3. Now Ron Dore is clear that this is a hypothetical -- I misread him. Would \1 trillion be enough to do anything? Japan's GDP is roughly \500 trillion, and there's over a 1% gap between potential GDP (reflecting idle physical and human production capacity). So \1 trillion helps, the more so if spent quickly. But it's still a modest amount relative to the gap. How about \10 trillion? -- I think that's the order of magnitude.

4. Economists of course talk about changing expectations. That's not so hard to do when the economy has tailwinds behind it, as in 1974: PM Tanaka's fiscal stimulus, with both the US and the European economies growing strongly going into the first oil crisis, meant that commodities of every sort were booming in price, and Japan already had double-digit inflation in May 1973, while the first of the big OPEC price hikes wasn't until June. Convincing Japanese in 1974 that inflation might rise a lot was not hard.

This time around -- the past 15 years -- nothing that the government has done has generated expectations of inflation, even though the sorts of increases in the monetary base would in the days of High Monetarism have been associated with wild inflation. (By High Monetarism I'm thinking ca. 1980 when Paul Volcker at the US Fed actually focused on "the" money supply.)

5. Yes, a chain saw is a good way to get rid of frustrations. Despite going through two full tanks of gas this morning, my hearing seems fine. It's my reading ability that suffers...and I have a hard time claiming age as an excuse. And as it happens #1 son was down with a fever, but he was supposed to be digging post holes for building flower beds for my other half...

mike smitka

PS: I've uploaded relevant graphs to my blog, contributions to GDP change and the composition of swings in investment, both for 2000Q1 through 2011Q4.

http://japanandeconomics.blogspot.com/2012/03/recent-gp
d-and-investment.html

Approved by ssjmod at 11:27 AM