Rogoff Redux

[oldfart]

I have had some harsh things to say about Ken Rogoff, but before he became a rightwing media darling, he was basically a pretty good economist. I also try to follow people in the profession who have something to say, even if I don't agree with them in terms of either economic theory or political economy, and Ken Rogoff is certainly in that category. So it was with interest I read his latest analysis of the Japanese economy and specifically of "Abenomics 2.0".

The article can be found here: http://www.project-syndicate.org/commentary/japan-slow-economic-growth-by-kenneth-rogoff-2014-12

It is now clear that the first round of Abe’s reforms – known as “Abenomics” – has failed to generate sustained inflation. Hopes for continued recovery have now given way to two consecutive quarters of negative growth. The question is whether Abenomics 2.0 will put Japan’s economy back on the path to renewed prosperity.

My own view is that the “three arrows” of Abenomics 1.0 basically had it right: “whatever it takes” monetary policy to restore inflation, supportive fiscal policy, and structural reforms to boost long-run growth. But, though the central bank, under Governor Haruhiko Kuroda, has been delivering on its side of the bargain, the other two “arrows” of Abenomics have fallen far short.

This is a pretty good summary of the Japanese situation, and what makes it more interesting is that Europe and to a lesser degree America will be dealing with the same issues of an aging work force in an age of low inflationary expectations and persistent lack of demand. So what happens in Japan is an experiment that should guide policy here and in Europe.

There has been no significant progress on supply-side reforms, especially on the core issue of how to expand the labor force. With an aging and shrinking population, Japan’s government must find ways to encourage more women to work, entice older Japanese to remain in the labor force, and develop more family-friendly labor policies. Above all, Japan needs to create a more welcoming environment for immigrant workers.

I'm not sure how this plays with the Rogoff admirers. Suggesting that the main solution to an aging workforce is immigration may sound good to mega corporations, especially those involved in health care, but will play less well with the populist Tea Party base. But at least Ken is clear about what he means by "structural reform in the labor market". To be fair, he also advocates encouraging later retirement and increased participation by women to increase the labor force. But those measures will clearly not be enough for Japan, and probably not enough for Europe or America; increased immigration seems a necessity.
Then he turns to the consumption tax.

The timing of the April 2014 consumption-tax hike (from 5% to 8%) was also unfortunate. It would not have been easy for Abe to postpone the move, given that it had been locked in place by broad-based political agreement before he took office. But the government could have engaged in more aggressive fiscal stimulus to counteract the hike’s short-term effects. Instead, two successive quarters of negative growth have had a dispiriting psychological impact.

True, the slump is partly an illusion: the earlier boom was fueled by Japanese households’ effort to beat the tax by front-loading purchases of consumer durables – a nuance that seems to have been lost in the public debate. But the big picture remains: Abenomics so far has failed to turn around a deflationary mindset.

Implicit in Rogoff's analysis is an acceptance of the usual neo-Keynesian view that healthy growth cannot occur with an entrenched deflationary mindset in the consuming public; and perhaps even an acceptance that there is some zone of low inflation (say under 2%) where there is a similar effect.

Again, I am not sure how happy Rogoff admirers will be with the suggestion that the failure of Abenomics to break a deflationary mindset could have been avoided with sufficient stimulus short term to counter-balance the increase in the consumption tax. I am uncomfortable with this observation for two reasons. First, I do not see the necessity of large increases in the consumption tax for long term fiscal reasons (that's a debate for another day). And secondly, using short-term stimulus for this purpose seems to me to be stunningly inefficient.

Mind you, Japan’s outsize government debt and undersize pension assets are a huge problem, and only the most reckless and crude Keynesian would advise the authorities to ignore it. For the moment, the risks are notional, with interest rates on ten-year government debt below 0.5%. But saying that Japan’s debt is irrelevant is like saying that a highly leveraged hedge fund is completely safe; the risks may be remote, but they are not trivial. Think about what would happen if the Bank of Japan actually managed to convince the public that inflation will average 2% on a sustained basis. Would ten-year interest rates still be 0.5%?

OK, I spot him the red meat line for the peanut gallery. I think I agree with the conclusion, but I have no idea how he gets there. He sets up a straw man argument ("saying Japan's debt is irrelevant") to dismiss without any reasoning behind it.

So Rogoff's prescription for Japan is monetary expansion, delays in the consumption tax, fiscal stimulus, and structural changes in the labor market, especially more immigration. Doesn't sound very Austrian to me.

 

[william the wie]

Doesn't sound like it addresses demographic issues like the Far East age 60 retirements, over-investment in useless show projects and a slew of rather important things that do matter but are not labeled as economics.

 

[EdwardBaiamonte]

I have had some harsh things to say about Ken Rogoff, but before he became a rightwing media darling, he was basically a pretty good economist. I also try to follow people in the profession who have something to say, even if I don't agree with them in terms of either economic theory or political economy, and Ken Rogoff is certainly in that category. So it was with interest I read his latest analysis of the Japanese economy and specifically of "Abenomics 2.0".

The article can be found here: http://www.project-syndicate.org/commentary/japan-slow-economic-growth-by-kenneth-rogoff-2014-12

It is now clear that the first round of Abe’s reforms – known as “Abenomics” – has failed to generate sustained inflation. Hopes for continued recovery have now given way to two consecutive quarters of negative growth. The question is whether Abenomics 2.0 will put Japan’s economy back on the path to renewed prosperity.

My own view is that the “three arrows” of Abenomics 1.0 basically had it right: “whatever it takes” monetary policy to restore inflation, supportive fiscal policy, and structural reforms to boost long-run growth. But, though the central bank, under Governor Haruhiko Kuroda, has been delivering on its side of the bargain, the other two “arrows” of Abenomics have fallen far short.

This is a pretty good summary of the Japanese situation, and what makes it more interesting is that Europe and to a lesser degree America will be dealing with the same issues of an aging work force in an age of low inflationary expectations and persistent lack of demand. So what happens in Japan is an experiment that should guide policy here and in Europe.

There has been no significant progress on supply-side reforms, especially on the core issue of how to expand the labor force. With an aging and shrinking population, Japan’s government must find ways to encourage more women to work, entice older Japanese to remain in the labor force, and develop more family-friendly labor policies. Above all, Japan needs to create a more welcoming environment for immigrant workers.

I'm not sure how this plays with the Rogoff admirers. Suggesting that the main solution to an aging workforce is immigration may sound good to mega corporations, especially those involved in health care, but will play less well with the populist Tea Party base. But at least Ken is clear about what he means by "structural reform in the labor market". To be fair, he also advocates encouraging later retirement and increased participation by women to increase the labor force. But those measures will clearly not be enough for Japan, and probably not enough for Europe or America; increased immigration seems a necessity.
Then he turns to the consumption tax.

The timing of the April 2014 consumption-tax hike (from 5% to 8%) was also unfortunate. It would not have been easy for Abe to postpone the move, given that it had been locked in place by broad-based political agreement before he took office. But the government could have engaged in more aggressive fiscal stimulus to counteract the hike’s short-term effects. Instead, two successive quarters of negative growth have had a dispiriting psychological impact.

True, the slump is partly an illusion: the earlier boom was fueled by Japanese households’ effort to beat the tax by front-loading purchases of consumer durables – a nuance that seems to have been lost in the public debate. But the big picture remains: Abenomics so far has failed to turn around a deflationary mindset.

Implicit in Rogoff's analysis is an acceptance of the usual neo-Keynesian view that healthy growth cannot occur with an entrenched deflationary mindset in the consuming public; and perhaps even an acceptance that there is some zone of low inflation (say under 2%) where there is a similar effect.

Again, I am not sure how happy Rogoff admirers will be with the suggestion that the failure of Abenomics to break a deflationary mindset could have been avoided with sufficient stimulus short term to counter-balance the increase in the consumption tax. I am uncomfortable with this observation for two reasons. First, I do not see the necessity of large increases in the consumption tax for long term fiscal reasons (that's a debate for another day). And secondly, using short-term stimulus for this purpose seems to me to be stunningly inefficient.

Mind you, Japan’s outsize government debt and undersize pension assets are a huge problem, and only the most reckless and crude Keynesian would advise the authorities to ignore it. For the moment, the risks are notional, with interest rates on ten-year government debt below 0.5%. But saying that Japan’s debt is irrelevant is like saying that a highly leveraged hedge fund is completely safe; the risks may be remote, but they are not trivial. Think about what would happen if the Bank of Japan actually managed to convince the public that inflation will average 2% on a sustained basis. Would ten-year interest rates still be 0.5%?

OK, I spot him the red meat line for the peanut gallery. I think I agree with the conclusion, but I have no idea how he gets there. He sets up a straw man argument ("saying Japan's debt is irrelevant") to dismiss without any reasoning behind it.

So Rogoff's prescription for Japan is monetary expansion, delays in the consumption tax, fiscal stimulus, and structural changes in the labor market, especially more immigration. Doesn't sound very Austrian to me.

it is not Keynes or Austrian. Capitalism assume stable prices, low consumption taxes, but not fiscal stimulus, and is neutral about immigration as an economic matter.

 

[oldfart]

Doesn't sound like it addresses demographic issues like the Far East age 60 retirements, over-investment in useless show projects and a slew of rather important things that do matter but are not labeled as economics.

I think Rogoff does a reasonable job on the demographic issue. He proposes three ways to supplement the future labor force: encouraging older workers to remain in the work force longer, increasing participation by women, and more immigration.

The issue of spectacularly bad overinvestment in show projects ("empty cities") is a Chinese feature, not Japanese. I don't think Japan, Taiwan, Hong Kong, South Korea, Singapore, and similar economies have a reputation for that kind of inefficiency; quite the opposite.

I'm not sure what you have in mind in reference to "important things that do matter but are not labeled as economics", that covers a lot of ground. Maybe you are getting at what I found unsatisfying about this article. It was intended as a fluff piece, long on conclusions with not much analysis, maybe an "executive summary".

I would be interested in your take on how similar Japan's experience will be to Europe and America's developing situation. It seems to me that the developed world is having a hard time adjusting to a lower growth, low inflation, aging economy.

 

[william the wie]

Doesn't sound like it addresses demographic issues like the Far East age 60 retirements, over-investment in useless show projects and a slew of rather important things that do matter but are not labeled as economics.

I think Rogoff does a reasonable job on the demographic issue. He proposes three ways to supplement the future labor force: encouraging older workers to remain in the work force longer, increasing participation by women, and more immigration.

The issue of spectacularly bad overinvestment in show projects ("empty cities") is a Chinese feature, not Japanese. I don't think Japan, Taiwan, Hong Kong, South Korea, Singapore, and similar economies have a reputation for that kind of inefficiency; quite the opposite.

I'm not sure what you have in mind in reference to "important things that do matter but are not labeled as economics", that covers a lot of ground. Maybe you are getting at what I found unsatisfying about this article. It was intended as a fluff piece, long on conclusions with not much analysis, maybe an "executive summary".

I would be interested in your take on how similar Japan's experience will be to Europe and America's developing situation. It seems to me that the developed world is having a hard time adjusting to a lower growth, low inflation, aging economy.

China holds the record on scale but Japan, Myanmar and other Asian countries do have white elephant investments. it is a traditional Asian economic policy like the name implies. In the case of Japan and South Korea shipyards are the preferred form of malinvestment that gets mentioned in election campaigns.

 

[EdwardBaiamonte]

[

The issue of spectacularly bad overinvestment in show projects ("empty cities") is a Chinese feature, not Japanese. .

of course that is 100% absurd anad liberal. Japan is deeply in debt compared to any country and much of it is from building idiotic, make-work, stimulus infrastructure projects that have acheived nothing other than wasting money and resources.

 

[EdwardBaiamonte]

and persistent lack of demand. .

what a perfectly stupid liberal concept that is, as if there is some way for the lib commie central govt to know how much demand there is supposed to be and then pull some strings to create the right amount of demand.

The fact is real demand or real economic growth, since the stone age, has come from the supply of new inventions. Republican capitalist supply side economics creates real economic demand and real economic growth.

Does the liberal understand now?