oldfart
Older than dirt
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
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.
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.
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.
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.
The article can be found here: http://www.project-syndicate.org/commentary/japan-slow-economic-growth-by-kenneth-rogoff-2014-12
Ken Rogoff said: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.
Ken Rogoff said: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.
Ken Rogoff said: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.
Ken Rogoff said: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.