In response to calls for clarification by persons as ignorant as myself, Dr. Paul Krugman has explained his support for Abenomics.
Krugman's argument, and it seems a good one, is that Japan is in a liquidity trap, where the optimum real interest rate, where savings and investment intersect, is negative. Unfortunately, with deflation and nominal interest rates at the zero bound, there is no way for conventional monetary policy to generate the optimal real interest rate. (Link and, as background, Link)
The answer is government-policy driven inflation, with allows the economy to achieve the desired intersection of savings and investment.
Ignoramuses such as myself may still not accept the story, convinced that the Abe program as simply the taking advantage of of the patience of Japan's bond holders. If Japan's debt were held more broadly and domestic financial institutions were not stuffed to the gills on Japanese paper, leaving them hostages to their own capital bases, it is unlikely for any of these fiscal and monetary shenanigans would fly.
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9 comments:
I am surprised you were unaware, MTC. The "liquidity trap" explanation is both very descriptively powerful and seems to reflect reality. It is also the basis of Keynesian criticism of BOJ, European austerity, and American Republicans. It is the same argument they have been making for years.
I thought you were aware of it. Krugman has been talking about it forever. Bernanke, Noah Smith, and Matt Yglesias believe in this model. Yglesias is not at all trying to use Japan to talk about US policy as you keep weirdly stating. I think you can assume he is being sincere and that he is not completely ignorant of the differences between the US and Japanese demographics.
Your continued attacks on Abenomics is awful. I thought the Toyota post was especially bad. No. I do not think the number 1 car maker with the most innovative business process in the world is an incompetent company. I think you can assume that Toyota's complaint reflects its desire to employ more Japanese in high paying high skilled jobs.
These attacks have been the worst part of following your blog. I'll still follow your blog because your blog is much more than Abe-bashing.
I do not mean to say that you may not ultimately have a point. Noah Smith does not believe that Abe is Keynesian. He thinks Abe is really nothing more than an opportunist.
[To sum up: Once again, I think that Abe's appearance as a bold Keynesian experimenter is a cover for a program of traditional mercantilism and corporatism.]
http://noahpinionblog.blogspot.com/2013/01/is-shinzo-abe-great-keynesian-hope.html
http://noahpinionblog.blogspot.com/2012/12/trust-not-in-shinzo-abe-ye-monetarists.html
And he has convinced Krugman not to believe in Abe. Krugman freely admits that he does not follow the situation in Japan much and Smith is a respected blogger among the Keynesians.
And in fact, you may very well be correct about Abe.
But there are reports that Abe has mentioned Hamada Kouichi of Yale as an important advisor.
http://www.zakzak.co.jp/society/politics/news/20130129/plt1301290710001-n1.htm
Hamada's point seems to be that Japan should be pulling every policy lever available to it to push the economy into inflation.
Maybe instead of just bashing Abe, you might try to find out who his economic advisors are and see what they think.
I have a hard time seeing Taro Aso as a key advisor on economic issues. In fact, I do not know what his role actually is.
Anonymous -
Thank you for your lengthy comment. I take all of your criticisms to heart.
Re: the liquidity trap
a) I was aware of it. Notice that Krugman, who has been saying since the mid-1990s that Japan's economy is caught in a liquidity trap, felt it necessary to write a post about it in 2013. Is this not, in retrospect, more than a little bizarre? The world's most famous economist writes about a subject for nearly two decades and has to constantly reexplain it?
b) Abenomics partisans has been declaiming "we have to end deflation by whatever means possible" without an explanation as to why. Krugman provides an explanation.
Excuse me, but was this not the job of someone on the Abe team?
Re: Abe bashing
If my senses tell me that all of this will end in tears, my obligation is to say so. To keep my own counsel, or worse shine a flashlight here and there in search of Abe's purported pragmatism, would be unconscionable.
Re: Toyota
A Japanese identity for Toyota Motors is fine but the business has to work as a business.
Re: Abe advisors
If Abe is a bold, Keynesian experimenter, then the actions and statements of his government would be sufficient -- I would not have to check what his advisors are saying.
If Abe is an opportunist, then what his advisors are saying is irrelevant, as he is cherry picking from their programs the items that further his political program.
Either way...
Re: Aso Taro's role
Abe names as a self-proclaimed unlearned man as both his finance minister and his minister of financial services -- then sets in motion radical fiscal and monetary programs.
I cannot help it. The words "insincere" and "cynical" just bubble up.
"Ignoramuses such as myself may still not accept the story"
Nothing to do with ignorance really. Very little of what Krugman says makes much sense when looked out with some sort of logical reasoning. He and the Keynesian theories he supports have been empirically shown to be wrong again and again, and their further use in Japan will only make matters worse.
Tom -
What would you propose as an alternative to Keynesian economics? Rational expectations? Austrian School?
Dr. Krugman is an honest broker; honest enough to say that the devil is in the details. In the case of Japan's economy, the details -- equities markets without activist investors, financial institutions incapable of protecting themselves from a suddenly rapacious government -- matter, and matter a lot.
[Is this not, in retrospect, more than a little bizarre?]
No. Why should it be? I do not understand your point.
And how long will you rail against Abenomics?
[If my senses tell me that all of this will end in tears, my obligation is to say so. To keep my own counsel, or worse shine a flashlight here and there in search of Abe's purported pragmatism, would be unconscionable.]
Interestingly, Krugman actually and extensively explains in these two books why he repeats himself:
"The Return of Depression Economics and the Crisis of 2008"
and
"End This Depression Now!"
I strongly recommend both.
[Abenomics partisans has been declaiming "we have to end deflation by whatever means possible" without an explanation as to why. Krugman provides an explanation.]
I do not understand why you say this. You seem to be saying you are aware of the liquidity trap arguments. Yet, you say here that you have not noticed that inflation promotion/targeting is an essential policy recommendation in this scenario and how it contributes to escape velocity.
[Japanese identity for Toyota Motors is fine but the business has to work as a business.]
You still have not explained how Toyota Motors does not actually work as a business.
http://www.guardian.co.uk/business/2013/jan/15/toyota-world-no-1-carmaker
[If Abe is a bold, Keynesian experimenter, then the actions and statements of his government would be sufficient -- I would not have to check what his advisors are saying.]
MTC, I feel like I'm following you in a circle here.
[If Abe is an opportunist, then what his advisors are saying is irrelevant, as he is cherry picking from their programs the items that further his political program.]
How would it be irrelevant if much of the policies were to turn out to have actual merit? So far, I'm pretty optimistic.
[Abe names as a self-proclaimed unlearned man as both his finance minister and his minister of financial services -- then sets in motion radical fiscal and monetary programs.]
I just took it to mean that the minister's offices are not really all that functional.
I took Abe's actions to mean that he has some strong minded advisors influencing him. It seems bizarre that you would not care to know what they have to think as what Abe is doing is highly out of the ordinary--"radical," though not Takahashi K radical as you say--and unexplained by casual insinuations of ordinary corruption.
Anonymous -
Re: Krugman
Thank you for the references.
Re: Toyota
a) The profit booked was inadvertent.
b) If Toyota's goal is to keep itself unprofitable in order to avoid taxation, fine. It is now on line to pay taxes it was not expecting to pay.
If Toyota's goal is to be profitable, then why is it not, given that the company is doing so well?
Re: inflation targeting
The liquidity trap is a compelling argument. However, this argument is not used by those selling the Abe program. The stated goals of Abenomics are ending deflation and ending the era of a high yen, full stop, with only an occasional detour through "deflation makes it hard for debtors to pay back their debts."
If the goals and the methods of the policy are confused, can the policy still work?
Re: optimism
Optimism is nice but not rational.
In this case, we see capital flight (a falling yen), sharpies banking on the possibility of unloading overpriced equities on rubes and bond markets unable to respond to the news.
Not a pretty picture.
Re: Aso Taro as Finance Minister
If the finance minister is not in charge of the Finance Ministry, who is in charge? The country cannot afford unaccountability.
[Thank you for the references.]
--MTC
I am going to take this as patient and somewhat friendly sarcasm. I get the feeling you read everything. ;)
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[The liquidity trap is a compelling argument. However, this argument is not used by those selling the Abe program. The stated goals of Abenomics are ending deflation and ending the era of a high yen, full stop, with only an occasional detour through "deflation makes it hard for debtors to pay back their debts."]
--MTC
Yes. Noah Smith agrees in the links I provide above.
[To sum up: Once again, I think that Abe's appearance as a bold Keynesian experimenter is a cover for a program of traditional mercantilism and corporatism.]
--Noah Smith
I do not think that American economists think Abe is Keynesian. And I think that ultimately you may be right in your view of Abe. The point is whether even if the LDP are not Keynesian, if they push through Keynesian policies because such policies are in harmony with their actual aims, there would be a Keynesian outcome nonetheless.
http://krugman.blogs.nytimes.com/2013/01/12/worthwhile-japanese-initiative/
[So while I very much dislike what Abe stands for on cultural issues, and take very seriously Noah Smith’s warning that he may be basically about patronage politics, none of that matters on the macro front; it sure looks as if Japan is, for whatever reason, doing the kinds of things an economy still stuck in the Lesser Depression should be doing.]
--Paul Krugman
Still, I wonder how often visions of Takahashi Korekiyo pop up in the mind of Abe.
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[If the finance minister is not in charge of the Finance Ministry, who is in charge? The country cannot afford unaccountability.]
--MTC
This is what I want to know! I never got the sense that Taro Aso had anything to do with the formulation of Abenomics as we know it.
Do you think he is the mastermind?
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[The profit booked was inadvertent.]
--MTC
Whoa! I have not heard anything yet about a retraction by Toyota of its recent profits declaration. All I see on Google news is that Toyota has made a remarkable comeback in vehicles sold, market share, and profits made. Can you please clarify what you mean?
[Toyota Motor raised its profit forecast for the fiscal year ending March 31 as it reported a third-quarter profit up 23% from a year ago to 99.91 billion yen ($1.09 billion)....
...
Toyota said in Tokyo that it now expects to finish its fiscal year with a profit of 860 billion yen ($9.3 billion), a forecast raised from 780 billion yen ($8.5 billion). That would be a five-year high for Toyota profits.]
--from Feb 5, 2013:
http://www.usatoday.com/story/money/cars/2013/02/05/toyota-raises-annual-forecasts-on-profit-rise/1892275/
Toyota does mention that its net loss in North America should be attributed in part to its legal costs, including the $1 billion class action settlement. But it seems to be a pretty profitable business right now even considering how it had to rebound post-Tohoku, post Senkaku, and post sudden-acceleration.
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[In this case, we see capital flight (a falling yen), sharpies banking on the possibility of unloading overpriced equities on rubes and bond markets unable to respond to the news.]
--MTC
I can't comment much on your sharpies fear because I know almost nothing about Japanese equities and bond markets. There are only a few Japanese companies I am observing with interest right now and none of them are large or public enterprises. But if you are trying to suggest that Abenomics will sink these markets and allow opportunists to take advantage of a possible temporary rise in equities value, I think I get why you think that from what you have been saying. But I absolutely doubt unloading overpriced equities on rubes is the reason Toyota or Sony support Abenomics.
As for the falling yen, of course this is one of the intended goals of Abenomics, not an undesired side effect. You have already admitted you believe in demand driven recovery so you know the advantages.
Only two specific comments:
@MTC [a) I was aware of it. Notice that Krugman, who has been saying since the mid-1990s that Japan's economy is caught in a liquidity trap, felt it necessary to write a post about it in 2013. Is this not, in retrospect, more than a little bizarre? The world's most famous economist writes about a subject for nearly two decades and has to constantly reexplain it?]
I don't see at all how this is at all bizarre, since (1) the topic has come back up due to current events and the underlying (macro-)economic conditions haven't changed (2) he mainly writes to respond to other people in various places (the blogosphere, newspaper columns, etc.), and if people keep coming up with the same (one might even say in many cases "tired, old") topics, those are the ones he's likely to address. He's not the sort to go hide in some ivory tower, he's (oh so) willing to engage even his most disingenuous critics, and boy do they repeat themselves a lot.
@Tom: I'd like to have some of what you're smoking, your alternate reality bubble is strong and smells of roses.
Beyond that, with regard to Abe, I have pretty much the same thoughts as anonymous (and especially Noah Smith). Abe may be very much the wrong person accidentally doing some of the right things for the wrong reasons.
And you're right, it may end in tears -- because like you I don't trust him, specifically, I don't trust him to keep doing the right thing. But that doesn't mean that what he's doing now won't be beneficial.
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