Martin Wolf Drops The Other Shoe...

...and it lands on Paul Krugman's head.

This is one of my posts on Abenomics.

If your daily bowl of rice depends on your organization's convincing trusting savers to invest their money in shabby assets, you might want to click off.

Two months ago I expressed relief that Dr. Krugman took a moment to explain his support for Abenomics -- or at least the deliberately irresponsible monetary and fiscal policies that are all we are likely see of the three arrows of Abenomics, welcome party speeches notwithstanding.　(Link)

The explanation that Krugman provided in February was that the Japanese economy, even at zero nominal interest rates, fails to generate a demand for investment capable of consuming all available savings (Link). By creating inflation and inflationary expectations, the government and the central bank drive real interest rates into negative territory, bringing savings and investment into line.

There was always a bit of legerdemain in the Krugman treatment, failing as it does to provide the bridge in between interest rates and investment. "Invest in what?" is the question that always came to ignorant, non-arithmetic minds minds like mine. "What is this investing by Japan's consumers and corporations that current real interest rates have been preventing?" *

Martin Wolf, in his column for the Financial Times last week, provided what should have been a sobering answer: no such investment exists. According to Wolf's argument, stagnation in the Japanese economy is not the result of failure to reach an equilibrium in between investment and savings. Instead, it is the product of the double whammy of high rates of retained earnings and idiotically low returns on existing investment. In Wolf's view, unless there are reforms creating huge disincentives for corporate savings – an extremely unlikely event, in light of the multi-year effort of the Japan Business Federation (Nippon Keidanren) to justify a lowering of corporate income tax rates – the boost from the debasing of the currency will be temporary, at best. (Link)

Wolf and Krugman are not in opposing ideological camps. They are both interventionists, seeing actions by governments and central banks as crucial to altering the contours of economic events.

However, as regards Abenomics, either Wolf or Krugman is right. Of the two columnists, Wolf presents the more convincing story.

The problem is that the success of the Abe government's program is predicated on Martin Wolf being wrong. Abenomics works only if Krugman's right...or if inflation's soaking up of excess savings is not the engine, then some other inflation-induced growth mechanism kicks in increasing consumer spending and lowering the dependence on government debt-fueled economic activity.

The keys to sparking economic growth (and here I am exposed to the slings and arrows of those who truly do know better, like Alexander Kinmont and Peter Tasker**) have always been structural reforms -- and not the ones the Trans Pacific Partnership is promising. What are necessary -- for both in terms of political viability and fairness -- are counterbalanced reforms, one example of which would be the removal of restrictions on the firing of workers (a recommendation of members of the Industrial Competitiveness Council - Link) paired with a ferocious enforcement of limits on working hours.

Unfortunately, given the almost purely political and not-just-seemingly-but-actually irresponsible nature of the changes being instigated under the banner of Abenomics, the outlook for real reform and thus durable increased economic return is poor.

As for Professor Krugman, he is in the United States, which is the actual subject of his Japan postings. His recent virtual victory lap (Link) is a bit unseemly, given the uncertainty (check out the number of times Wolf uses "might" and "could" in his article) of a positive outcome from the Abe government's policies.


Later - For a worthwhile defense of Abenomics, read Okumura Jun's posted crib sheet for a panel discussion on Chinese state radio.

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* I have a similar problem with the "part of what Japan's economy needs is greater participation of women in the workforce" statements. My impertinent response is, "Doing what, exactly? What safe, rewarding, decently remunerated jobs are left begging for workers?"

** My suspicion is that Chris White is the smartest of this incredibly smart group -- for the very simple reason that he has to my knowledge never written about investment.