The death of Keynesian economics another step closer

You would think the Japanese would at least have absorbed the lessons from the catastrophic results of their first stimulus. Such was not the case so they tried another. Didn’t work again.

The economy of Japan, long stagnant, has taken a sharp turn for the worse: It contracted nearly 7 percent (annualized and inflation-adjusted) in the quarter ending in June. By way of comparison, consider that the U.S. contraction in the quarter ending in June 2009, when we were feeling the worst of the financial crisis, was 4 percent; the worst quarter of the 1982 recession saw a contraction of 2.6 percent. You’d have to go back to the 1940s to see a quarter with a 7 percent contraction in the United States.

As a kind of kiss of death, Paul Krugman was full of praise for the policies adopted, called Abenomimcs after the Japanese Prime Minister Shinzo Abe. This is what Professor Krugman said a year ago:

The really remarkable thing about “Abenomics” — the sharp turn toward monetary and fiscal stimulus adopted by the government of Prime Minster Shinzo Abe — is that nobody else in the advanced world is trying anything similar. In fact, the Western world seems overtaken by economic defeatism.

Another great victory for Keynesian stimulus. A few more victories like that and we will be at poverty levels not known since the 1930s. Possibly as remarkable as the outcome in Japan is that even the commentator at National Review Online doesn’t actually understand it himself. He doesn’t really know why these policies didn’t work and can only say something vague about the mathematisation of economic theory and the difficulties in applying policies that might work in one country to another.

Strangely, the policy adopted in Japan included increases in consumption taxes which I am incredulous that anyone would believe would lead to a recovery. Raising taxes in a recession is dead set dumb, as dumb as raising public spending. Next time they should try lower taxes and lower public spending to see how that works out for a change. I know it’s out of fashion, but you never know what might happen then.

[Via Instapundit]

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59 Responses to The death of Keynesian economics another step closer

  1. Tel

    As a kind of kiss of death, Paul Krugman was full of praise for the policies adopted, called Abenomimcs after the Japanese Prime Minister Shinzo Abe.

    Taking ordinary everyday wrongology and elevating up to a fine art.

  2. Tel

    Raising taxes in a recession is dead set dumb, as dumb as raising public spending.

    The problem for Japan is they are both in a recession and their government debt-to-gdp levels are astronomical. This doesn’t leave them a lot of room to move, so they have boxed themselves into a corner. By raising tax they have a small chance of balancing the books, if they can also cut spending.

    There’s a demographic problem that people don’t much talk about. Older Japanese tend to support Abe and also buy government bonds out of tradition and duty, but younger Japanese don’t buy bonds, nor do they expect the retirement funds to still be solvent when they retire. There’s a but of a tude shift coming along.

  3. Rabz

    As a kind of kiss of death, Paul Krugman was full of praise for the policies adopted, called Abenomics after the Japanese Prime Minister Shinzo Abe.

    Speaking of wrongology, those would be Nobel Economics Laureates mUttley and the semenblogger were also “full of praise for the policies adopted”.

    Gee, who’da thunk it.

  4. Rabz

    There’s a demographic problem that people don’t much talk about.

    Way more Japanese people are dying each year than are being born and the population is ageing at an express rate. Given Japan has virtually no net immigration, that’s what I’d call one heck of a demographic problem.

    Add in the enormous shock of the tsunami (a Keynesian circumstance, if ever there was!) and the place is basically rooted, minus of course, any actual rooting (which Japanese yoof now stridently eschew).

  5. thefrollickingmole

    Keynes will never die, it promises politicians they have near divine powers of racking up debt because “in the long run we are all dead”.

    Have a look at the political price paid by Labour now for the profligacy of their term in office, its an electoral bonus as Super-Keynes comes to their rescue with his illogical theory that government spending is just as good as private.

  6. Empire

    I wish I shared your optimism Steve.

    FantasyMacro (Y=C+I+G) provides ideal cover for the statanists to pursue their perpetual covert mission: the invention of imaginary public goods, for the purpose of harvesting votes.

    They will never lay down their arms voluntarily, no matter how persuasive the argument.

    Only fear and loathing can defeat Maynard. There is much work to be done.

    Keep fighting the good fight Steve.

  7. sdfc

    So it’s deflation all the way.

  8. Peter from SA

    From the article:

    Krugman, holding up Abenomics as a model, described Japan’s policy as the only operating alternative to the “economic defeatism” of the West:

    A strange example of reverse logic, it would seem. Clearly it is Krugman who has no alternatives.

  9. They were trying to skim the event horizon. To be honest, this has been booked in since ’89.

    More to come yet.

  10. MartinG

    Raising taxes in a recession is dead set dumb, as dumb as raising public spending.

    Why is this simple statement so hard for our liberal party to understand?

    You can’t balance the budget the deficit by raising taxes and increasing public spending.

    Both actions contract employment in the private sector.

    The only real income a government derives through tax receipts, are the product of the private sector.

    The way to repair the budget is to drop both taxes and spending by the government because it stimulates private sector activity.

    Stimulating private sector activity increases the real income a government derives through tax receipts

    A short term rise in both unemployment and the budget deficit is the price you pay for long term private sector economic growth with a gradual contraction of unemployment in both the private and public sectors along with a rise in real income for the government.

    A rise in real income for the government depreciates the budget deficit.

    Today the lefty media is in a frenzy, accusing Hockey of being a heartless bastard for pointing out low income earners (now called the poor) will pay less tax than high income earners due to him re-introducing the automatic CPI increase of the tax on fuel,

    Abbott of course apologized for his treasures poor verbal framing a statistic.

    Clowns, the pair of them. They are increasing a tax that will not only negate any benefit of repealing the carbon dioxide tax but will increase costs through both the public and private sectors.

    Abbott and Hockey are economically illiterate and according the lefty press cruel and disrespectful to the poor.

    The political circus will no doubt roll on while the clowns and ring master extend the damage Rudd, Gillard and Swan did to the economy, and our ever vigilant media will focus on politically correct trivialities.

  11. sdfc

    That’s one hell of a tax cut multiplier you’ve got going there.

  12. JC

    The problem for Japan is they are both in a recession and their government debt-to-gdp levels are astronomical. This doesn’t leave them a lot of room to move, so they have boxed themselves into a corner. By raising tax they have a small chance of balancing the books, if they can also cut spending.

    Japan will increase QE this year or very early next year. Take that to the bank. They have too as it’s been a successful policy. Euroweenieland will do real McCoy QE this year too.

  13. JC

    Why is this simple statement so hard for our liberal party to understand?

    I think because it’s not necessarily the case of the central bank does a counter monetary offset even through guidance.

  14. sdfc

    So it’s ever increasing QE?

  15. JC

    No, not in the sense you’re suggesting SDFC. The recent sales tax increase in Japan was actually good from the standpoint of budget and their debt circumstances. If you must raise tax, do it through indirect taxes.

    If the BoJ sense that the fiscal tightening causes a longish term dip in GDP as the most recent GDP stats suggests, Japan will QE.

    I’m actually okay with Japan at the moment. The indicators to look at are the stock market, JGB’s and the Yen. If the Yen goes through 100 and stays there then it’s trouble monetary policy is too tight or they didn’t counter the fiscal tightening.

    The place to worry about is Euroweenieland as the ECB is undeniably stupid.

  16. Bruce of Newcastle

    The Japanese government debt has now passed one quadrillion yen, a week ago.

    I wonder how long it will take them to pay it all back?

  17. sdfc

    JC

    So in a deflation you think it’s a good idea to implement a broad-based cut in private sector disposable income? Japan doesn’t really need deflationary policies. QE is a very narrow monetary channel.

    Bruce

    The BOJ can always buy them.

  18. .

    sdfc is a follower of the crank economic theory called chartalism. he wants the economy to be destroyed when the currency and banks collapse.

  19. sdfc

    MMT again? We’ve been through this. No.

  20. .

    10 trillion dollars injecting into the banking system does what exactly?

  21. Tel

    Japan will increase QE this year or very early next year. Take that to the bank. They have too as it’s been a successful policy.

    Well if people aren’t buying those government bonds and the government insists on getting further into debt then yeah, the options are rather limited, QE being the obvious one. You might notice that Japan’s CPI has jumped up a bit in recent times, I suggest it will keep going up. In effect this takes real purchasing power away from ordinary Japanese people and puts the money into government spending projects instead. Not sure how I’m supposed to profit on that, other than convincing the Japanese government to spend it on me.

    Euroweenieland will do real McCoy QE this year too.

    Hmmm, could be, all depends on Germany and how much tit-for-tat nose tweaking they want to do with Russia. I’ve been expecting Germany to walk away from the Euro for years but somehow they love it, symbol of wanting to be accepted I suppose.

  22. stackja

    Liberty Quotes
    Fiscal stimulus is still credited with saving Australia from recession — a claim made so often that many people actually believe it — even though numerous academic papers have shown this is false on theoretical and empirical grounds.
    — Tony Makin

  23. sdfc

    Dot

    $10 trillion dollars?

    Tel

    Inflation is what you want in a high debt economy. Deflation is disaster.

  24. sdfc

    Makin’s got some timing issues with his the mining sector saved us from recession argument.

  25. Bruce of Newcastle

    $10 trillion dollars?

    A quadrillion yen sounds better…more final.

  26. sdfc

    The Fed’ balance sheet is around $4 billion, so I doubt the BoJ’s is $10 trillion.

  27. sdfc

    There is no inflation of course.

  28. .

    Well you tell me the effect of the BOJ buying all JGBs on the Japanese economy. You seriously suggested it as a policy, rather than cut spending. Abenomics is utterly failing right now.

  29. sdfc

    You said $10 trillion dollars injected into the banking sector. I’m talking about direct cash injections into private sector bank accounts via central bank funded deficit spending.

    I’m a Keynesian remember, monetary policy loses its potency in a high debt economy in financial crisis. Why you think I’m a fan of QE is a mystery.

  30. Piett

    Hang on. Why is raising consumption taxes a bad thing? If I were a full-on believer in Say’s Law, I’d love consumption taxes. They give people an incentive to consume less and save more — which, under Say’s Law, is the pathway to nirvana, right?

    You might say that nirvana is no taxes at all, but since the Japs need to provide for defence (until such time as China stands down the PLA) and pensions (oldies begging in the streets is not a good look for a developed nation) and so on, consumption taxes are the best way of raising revenue. No?

  31. MartinG

    Piett
    #1418734, posted on August 16, 2014 at 1:51 am

    Hang on. Why is raising consumption taxes a bad thing? If I were a full-on believer in Say’s Law, I’d love consumption taxes. They give people an incentive to consume less and save more — which, under Say’s Law, is the pathway to nirvana, right?

    You can’t tax your way out of a deficit.

    Rank Country Revenues Expenditures Deficit (million USD)

    2 Japan 1,971,000 2,495,000 −524,000

    What the fuck is Japan spending revenue on? Don’t forget that’s gross revenue, not gross real income.

    With respect Piett, don’t you think they have a spending problem.

  32. entropy

    Piet, trying to control consumption is a Keynesian approach. But that isn’t why they raised consumption taxes. They are focused on the problem that their revenue does not match expenditure, and they would rather address the former rather than the later.

  33. 2dogs

    I’m talking about direct cash injections into private sector bank accounts via central bank funded deficit spending.

    You are being somewhat vague, sdfc. What exactly does the central bank balance sheet look like after this operation?

  34. Tel

    They give people an incentive to consume less and save more — which, under Say’s Law, is the pathway to nirvana, right?

    Think about it, you are a Japanese factory worker and you buy government bonds at 0.5% interest, or anyway pretty close to zero. Then while you are holding those bonds, a tax gets put on all the things you wanted to buy… in effect a big chunk has been taxed out of your savings! Then QE comes along and devalues those savings even more.

    How is that going to encourage anyone to save? After being bitten once, they won’t come back for more.

    Find a young Japanese tourist, buy them a few drinks, after you get them in a good mood, ask them about their savings habits, and about their parent’s saving habits and let them explain why.

  35. Were I a survivalist, I’d be checking over the use by dates on the baked beans in the bunker.
    This is NOT going to end well.

  36. Tel

    I’m talking about direct cash injections into private sector bank accounts via central bank funded deficit spending.

    Sixpack Inflationism, Steve Keen style…

    http://www.debtdeflation.com/blogs/2011/12/03/my-hardtalk-interview-transcribed/

    So far as I know, only ever been tried in Australia with the $800 tax refunds going out, along with roughly equivalent centerlink bonus payments. As a short-term stop gap to ease the worst of the crash it makes sense, expecially for a government that has some savings to dip into. As a long-term strategy to run an economy, it’s bloody stupid.

  37. Andrew

    This argument is misguided. Superficially, the economy grew strongly during stimulus, and shrunk badly when replaced by “austerity.” Krugman would see it as supporting his idiotic policies.

    The fact is there was immense bring-forward of consumption ahead of a big GST increase. That’s all. Whether it was good policy or not, it has had no effect. The JP economy did NOT contract anything like the worst since the 40s. It was a big one (-1.7%) but undetectable compared to 4Q08 in countries with insolvent banking systems. Compared to the year before, no big deal – solidly above their trend (zero) of 25 years.

    I’m a massive JP bear and told clients to invest in a JP bear fund in 2011. Despite the history of such things. But this article is just really inaccurate.

  38. .

    Why you think I’m a fan of QE is a mystery.

    Because you suggested it, FFS!

  39. Piett

    Think about it, you are a Japanese factory worker and you buy government bonds at 0.5% interest, or anyway pretty close to zero. Then while you are holding those bonds, a tax gets put on all the things you wanted to buy… in effect a big chunk has been taxed out of your savings!

    How is that going to encourage anyone to save? After being bitten once, they won’t come back for more.

    There are only two things a person can do with money: consume or save. Economists talk about marginal propensity to consume (MPC) and to save (MPS). If I consume 90% of my income, I have MPC 0.9 and MPS 0.1. MPC + MPS = 1 by definition.

    Are you honestly trying to suggest that a consumption tax increases MPC? Does a petrol tax increase one’s propensity to buy petrol? Does any tax increase the propensity to buy the thing taxed? You may be on to a wonderful revolutionary new theory of economics here, but I doubt it somehow.

  40. Piett

    You can’t tax your way out of a deficit.

    Why ever not? If you look at some countries, like say Germany and other north European countries post-WW2, you find very high tax rates and balanced budgets.

    I was just looking at the figures for Germany. Over the decades they collected much more revenue than Japan did as % of GDP — around 5-10% more. Which is huge. Japan took 28.6% of GDP as tax in 2011. Germany took 37.6%.
    http://stats.oecd.org/Index.aspx?DataSetCode=REV

    In the long-run, you’re compromising growth with high tax, sure. But in the short- to medium-term, you certainly can tax your way out of a deficit.

    What the fuck is Japan spending revenue on? Don’t forget that’s gross revenue, not gross real income.

    With respect Piett, don’t you think they have a spending problem.

    I dunno. I’d want to get into the budget documents and see what they’re spending on. I can’t just tell from the headline figure.

    All I was suggesting earlier is that, if one has to have a certain amount X of government revenue, it’s better to get X from consumption taxes rather than corporate or personal tax.

    And I note that Abeonomics includes a reduction in corporate tax from 35% to 29%. And structural reforms to free up the labour market, and deregulation, and free trade. The package doesn’t look bad to me at all.
    http://www.economist.com/news/asia/21605929-shinzo-abes-fight-reshape-japans-economy-and-society-entering-new-phase-battle-japan

  41. rickw

    Isn’t all economic growth ultimately underpinned by the use of technology to increase output per individual?

    and the place is basically rooted, minus of course, any actual rooting (which Japanese yoof now stridently eschew).

    Japan is one place in desperate need of teen pregnancy.

  42. sdfc

    2Dogs

    You are being somewhat vague, sdfc. What exactly does the central bank balance sheet look like after this operation?

    Similar, after all I am talking about debt monetisation, except the monetary stimulus would be through a broader channel.

  43. sdfc

    As a long-term strategy to run an economy, it’s bloody stupid.

    No kidding, you’re a genius.

  44. Tel

    Economists talk about marginal propensity to consume (MPC) and to save (MPS). If I consume 90% of my income, I have MPC 0.9 and MPS 0.1. MPC + MPS = 1 by definition.

    That’s hardly a constant figure set in stone. If you know you are going to get 10% real interest per day on your saving, that might be some sort of incentive to save more. If you know that your government can and does regularly dip into citizen’s private savings when convenient, well you might do whatever you want to do, but speaking for myself I’d be somewhat discouraged.

    There are only two things a person can do with money: consume or save.

    Wrong, a person with money can consume now, or consume at some future date. The consumption tax hits you either way. However, with the knowledge that there is zero probability of consumption tax ever decreasing, but a finite and quite plausible probability of consumption tax increasing, plus QE inflation, plus shitty low interest on saving… those things together make consumption now look more attractive than consumption in the future.

  45. sdfc

    So consumption taxes raise consumption. Is that what you are saying?

  46. Piett

    So consumption taxes raise consumption. Is that what you are saying?

    Yep, that’s what he’s saying! I look forward to Tel’s opinions on science, in which he will show that the force of gravity repels, and that the Moon is indeed made of green cheese. :)

    Wrong, a person with money can consume now, or consume at some future date.

    “Consume at some future date” = saving, by definition.

    However, with the knowledge that there is zero probability of consumption tax ever decreasing, but a finite and quite plausible probability of consumption tax increasing, plus QE inflation, plus shitty low interest on saving …

    OK, so your model has (1) an expectation of a future rise in the consumption tax. Yes, this will encourage current consumption. And (2) an expectation of a future decline in the real rate of interest. No, this encourages current saving, since the returns to savings now are higher than you expect they will be in the future.

    Pro-tip 1: economic analysis involves separating out factors, and trying to understand them individually. That’s part of the scientific method.

    Pro-tip 2: don’t just base your opinions on being the opposite of what Paul Krugman says. As I pointed out earlier, the Abenomics package is not some socialist monstrosity. It includes deregulation and company tax cuts. Japan is still taxing and spending far less than European countries, including ones like Germany that are doing quite well.

  47. wreckage

    oes a petrol tax increase one’s propensity to buy petrol? Does any tax increase the propensity to buy the thing taxed?

    Yes, in the case of inferior goods.

  48. Yohan

    Hang on. Why is raising consumption taxes a bad thing? If I were a full-on believer in Say’s Law, I’d love consumption taxes. They give people an incentive to consume less and save more — which, under Say’s Law, is the pathway to nirvana, right?

    This statement is similar to the one that thinks high marginal taxes encourage the rich to work harder to keep their same lifestyle level up.

    No Piett, higher taxes in any form means less consumption AND less savings. Different tax types can change the relative distribution between consumption and savings, but the overall economic activity going forward will be lower, the higher the tax is.

  49. Tel

    So consumption taxes raise consumption. Is that what you are saying?

    No you were not paying attention. If you have ten bucks in your pocket that is ten bucks worth of consumption. The amount of money is fixed, you can enjoy that consumption now (and pay whatever consumption tax might be imposed) or you can hang onto the money and enjoy the same consumption at a later date (and also pay whatever consumption tax might apply). Do you get it? Consumption happens either way, tax happens either way.

    I assure you most people can figure this one out.

  50. Tel

    OK, so your model has (1) an expectation of a future rise in the consumption tax.

    Doesn’t have to be an expectation, only has to be a plausible risk. People bitten once will tend to keep away from the thing that bit them. The Japanese people have been bitten twice on this so far, and their government is deep in debt with a habit of spending itself further into debt… where do you think the money is going to come from?

  51. Tel

    And (2) an expectation of a future decline in the real rate of interest.

    There already has been a decline in the real rate of interest, grab yourself a chart of the 10Y JGB rate spanning the last couple of decades and the general trend is downwards. A chart of the CPI for Japan shows it going up through the 80′s and 90′s, levelling off around 1998 but recently starting to uptick again. Put that together with a bit of basic knowledge about QE and government deficit and that looks to me like an environment hostile to savers.

    No, this encourages current saving, since the returns to savings now are higher than you expect they will be in the future.

    If someone has already decided that they don’t want to buy the fish today because the price is high and the meat is stinky, telling them the price will be higher tomorrow is unlikely to change their mind about buying it today.

    On the margin there still may be some savers who are set to change their mind in future, but when I hear the word “encourage” I don’t read that as “failed to completely discourage” although policy wonks may well have their own vocabulary.

  52. Tel

    I’ll ignore the quip on Scientific Method since it is off topic, but suffice to say that strictly speaking you are wrong on that. Separation of factors is not really part of the Scientific Method, although it may be a useful thing to do at times, and is one way (amongst many) of constructing a model.

    It is a bit weird talking about the Scientific Method in the context of macroeconomics anyhow, given that the people of Japan are not equivalent to any other group of people, and worse than that, the Japanese this decade are not equivalent to the Japanese of last decade, nor the next. This makes it rather difficult to propose a control experiment, and even more difficult to get repeatable results.

    People bitch about Austrian economists and their lack of enthusiasm for economic empiricism, but standard empirical techniques have a lot of problems in a macroeconomic context. Austrians recognise this limitation and proceed with caution, while other schools basically ignore the problems and proudly ponce around “being empirical”.

  53. Yohan

    Your right Tel. But it just leave’s the door wide open for people to give a flippant ‘so you Austrian’s reject empirical evidence eh’ response. The proper argument is so nuanced it is too difficult to condense into one talking point.

  54. Tel

    Everybody’s doing the Abenomics sux dance this year, and yeah I did follow the link from ZH so yeah I admit to thought crime.

    http://davidstockmanscontracorner.com/japans-keynesian-demise-a-cautionary-tale-for-our-times/

    But ZIRP has had enormous and untoward collateral effects that taken together comprise the proximate cause of Japan’s impending fiscal demise. First, Japan’s vaunted household savings rate—-the feature that funded its post-war CapEx boom—has ended up in the dustbin of history. During the last two decades it has dropped from the high teens as a percent of disposable income to a US style 3-4%. Indeed, it has gone from the highest rate in the world in the early 1980s to the lowest at present.

  55. 2dogs

    You remain vague, sdfc. For example, a government running a deficit would issue bonds; are these in your proposal held by the central bank or the public?

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