Friday, October 24, 2008

Asō Tarō Wants to Play With Your Mind

Can one use rational expectations to fool people into supporting the economy?

Among the issues near and dear to those of a bureaucratic mindset is the need to provide for the special medical care and needs of the baby boom generation. This army of tens of millions, currently in their early sixties and late fities, is expected to become a mass of frail and sickly septuaginarians. According to the panicked headlines of today's newspapers (none more panicked than The Asahi Shimbun, unsurprisingly) the fiscal typhoon of the costs of caring for these elderly boomers will reach maximum strength in the year 2025.

This distant crisis has provoked fearful, knee-shaking and lip-trembling about the need to raise the consumption tax.

Prime Minister Asō Tarō, somehow not losing his cool over a crisis seventeen years down the road has suggested that maybe, just maybe, the economic problems his government should be confronting are the ongoing international credit crisis and the incipient global collapse in demand. Sure the government will need to raise the consumption tax to pay for the needs of the boomers, he admits, "but not before the economy has improved, say in three years time."

This, even if inadvertent, is brilliant.

In the absence of a stimulus package, either tax cuts or fiscal outlays or both, the near-term threat, even an idle one, of a significant consumption tax rise is a great kick in the pants. With big numbers being batted about (a doubling of the tax to 10% seems the consensus) consumers and businesses have a strong incentive to get purchases done now rather than wait for better prices later.

Which I find somewhat amusing.

Rational expectations, the behaviors that thwart or subvert the policy intents of changes in the rules, are being harnessed to produce a positive policy outcome -- the autonomous support of consumption in the midst of a downturn -- despite the best efforts of individuals to evade paying for a social good.

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