Re the “Keynesian” and the “Institutional, Historical and Behavioral” Perspectives

Reproduced below with two minor edits are the relevant paragraphs in a memo that I prepared for an interview earlier in the week. Essentially a footnote to the previous post.

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As for the consumption tax hike, beyond the conflict between the public's acceptance of higher rates in the abstract and its dislike for a tax in the specific--part of human nature, like the acceptance of mortality and the fear of death; no wonder they say “death and taxes”—there are basically two competing views of experts. The cons say that raising taxes will depress spending and push Japan into a vicious cycle of recession and declining tax revenues, while the pros say that the market for government bonds will collapse from the ever-growing debt overhang and take the Japanese economy down with them. The first argument is the Keynesian while the second one is more institutional, historical [and] behavioral and is generally preferred by administrators and central bankers. Actually, they are mutually compatible. No government can keep borrowing more and more each year forever and no national government has managed to build and maintain a sustainable social safety net at VAT rates like Japan's or has maintained borrowing at such high levels without serious consequences. I'm not an economist so I don't have an opinion on the appropriate timing, but if you cannot decide that you will raise tax rates two years from now unless the economy is going south then and you're going to pump more money into the economy to try to make sure that won't happen, then I'm not sure you ever can.

Compounding the public's unhappiness is the fact that most of the annual 16.8 trillion yen in savings and renewable buried treasures that the DPJ promised that was going to be used to finance the social safety net and other worthy ventures before the government asked for a tax hike never materialized. But that point is moot because it's going to happen. Noda will have enough votes in both houses to pass the bill even if Ozawa manages to have all 30 of his upper house allies vote against it. Yes, Noda's popularity is likely to take a hit, but it'll be much smaller than if he gave up and drifted. And the LDP and Komeito will also take hits. Remember the story about the two hikers accosted by a hungry? One of them changes into sneaker and the other one says, “Why bother, you're not going to outrun the bear.” so the first one says, “No, but I only have to outrun you.”

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PS: Paul Sracic, whom I referred to in the previous post, has a CNN op-ed addressing the SCOTUS decision on Obamacare. America is increasingly polarized if Sracic is correct, while we in Japan have the opposite problem, which is the political urge to leave no constituency unsatisfied and leaves half the constituency undecided.

Toru Hashimoto Not Answer to Peter Tasker’s Hopes for Radical Solution to Japan’s Economic Woes

Paul Sracic, good friend of Japan since his Tokyo sojourn as a Fulbright Lecturer, shot me this link to a Financial Times op-ed by Peter Tasker. Tasker argues that the result of raising the consumption tax “is likely to be politically and economically disastrous” and instead suggests “more radical measures.” He says that “central bank could go beyond merely increasing its holdings of government bonds and cancel them, too. The target for tax hikes could shift from household spending to corporate savings.”

Broadly speaking, Tasker lines up on the Keynesian side of the never-ending debate between the Keynesian and the institutional, historical [and] behavioral perspectives pitting reputable economists on both sides, though fiscal and monetary authorities in advanced economies mostly line up on the latter. I’m not suggesting that I can settle this debate, but I do know that he is looking to the wrong political figure in Toru Hashimoto as the populist to carry out his proposals. Hashimoto may oppose the consumption tax hike deal between the DPJ, (PNP,) LDP and Komeito, but he’s a small-government neoliberal supported by similarly-minded policy advisers steeped in the Koizumi-Takenaka reforms.

I Think I Misunderestimated (Now) Mayor Hashimoto

The consumption tax hike and the politics around it have been dominating headlines (while the political decision to restart Units 3 and 4 at the Ohi Nuclear Power Plant quickly faded from view, a matter that I intend to take up briefly later), and Ozawa is at the center of attention. What will Ozawa do? What will Noda do to Ozawa? And what will the opposition have to say about it? However, when the dust settles, it will be Toru Hashimoto, the Osaka governor-turned-mayor—not Ozawa—who will be the center of speculation in the lead-up to what looks like a near-inevitable snap election and beyond.

Ozawa and Hashimoto have both positioned themselves in opposition to Noda on the consumption tax hike and the nuclear resets—two of the three major policy issues (a prospective bid to join the ongoing TPP negotiations is the other) that Noda has set his sights on as potential landmark achievements of his regime. Ozawa’s opposition to the tax hike is seen as opportunistic, but it’s hard to reject the argument that it violates the manifesto is a legitimate one, especially when you consider the fact that only a fraction of the multitrillion-yen fiscal savings that was supposed to precede any such talk materialized. Ozawa’s criticism of the nuclear restarts has been an out-of-nowhere revelation and viewed as a typically opportunistic maneuver, but Hashimoto’s last-minute acceptance—a flip-flop with a toothless summer-months-only caveat as fig leaf—is far from the first case where he has made very public turnabouts. Yet Hashimoto is the one that the DPJ, LDP, Komeito and, lest we forget, Your Party are all courting while Ozawa, if he bolts, will struggle just to gain control over the other DPJ dissidents that leave/are forced to leave and, in the case of many of them, will be hard put to win reelection. Hashimoto is all upside while Ozawa is all downside. Why?

Most Japanese voters do not know these two men personally. It’s probably safe to say that most Japanese voters have never even met them*. In fact, we know them almost purely through the media filter. So it is to the media coverage and its background that we should look to for an answer in the first instance. I took a whack at this question during a multiparty email discussion when I addressed a point in an Economist blog post**. I’m reproducing my take below, which essentially formed itself when I watched, at first reluctantly, a recording of a press briefing in the course of my work. And yes, I’ll get back to “ex-Mrs. Ozawa”’s letter. But not now.

*I haven’t, though I worked for a government ministry for years, and Hashimoto and I went to the same high school—many years apart, but there are annual alumni conferences. **I continue to have great respect for The Economist’s published articles but sometimes find blogposts there at fault—no, not yours, my friend—for misunderstandings and/or excessive hedging.

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“The public standing of the prime minister’s other foe, Mr Hashimoto, may have also peaked.” (from the Economist blogpost)

You know, “may” is the key word that renders the entire paragraph--like so much of media reports--worthless unless you have some understanding of the facts of the case. I wouldn't bet either way either, but one thing that the report doesn’t mention is that he has a much wider room for error than any other politician in sight, as can be seen from the way he goes from one position to another like...but let’s skip the simile...on issue after issue without visible harm. The media loves him, not just because he makes great copy, though he does, lots more than Ishihara. Unlike Ishihara, he engages reporters directly. He never evades a question (though he can go on and on, which sometimes should have the same effect), he's never condescending (though he may call you an idiot, or at least your question stupid, if he thinks you are/it is), and never gets testy when he's cornered (though he can lash out furiously when he's frustrated). He's not a bully; essentially, he treats people, politicians, garbage collectors, teachers, and yes reporters as members of civil society who have specific roles to play. He obviously has strong views about what those roles are and how those roles should be played. But he certainly respects the media, from Asahi Shinbun to NicoNico Doga,* and the media respect back. He'll have to change his style if and when he goes directly and personally into national politics, but till then, I think that the love affair will endure, because it's based on mutual respect.

* You should go watch one of his press briefings if you understand Japanese. I don’t think that I’ve ever managed to pay attention to a long—1.5 hours in this case—press briefing mostly uninterrupted by anyone else.

Fleeting Thoughts about Ozawa’s Possible Loss of Control over His Own Fate

57 DPJ members of the House of Representatives—enough to deny the ruling coalition a majority in the lower house if they leave the DPJ en masse—voted against the tax hike bill today. I now suspect that Ozawa will act sooner rather than later regardless of the severity of the sanctions or their timing, not because he really wants to but because many anti-tax hike Diet members will bolt without waiting for him, like nine lower house representatives did in April when the DPJ agreed to let the Noda administration adopt the tax hike. Any more significant and unscheduled defections like that, and his sway over his allies and followers could dwindle rapidly. His hold over his minions has never been as strong as we (myself included) sometimes assume, and the April show of independence was not the first nor last evidence of such. I think this will remind some of Saigo Takamori’s fate. Sometimes, the mikoshi is at the mercy of its bearers. That’s all for now. Back to work.

Very Brief Assessment of Noda’s Performance

This is it. “[Noda]'s done a pretty good job, all things considered. He's done two very important things: set priorities, then stick to them. The Noda administration could have done a much better job of managing the restart process after it took over and it surely could have caved more quickly on the Article 3 Commission impasse, but some of the blame has to go to Edano, Hosono, and to a lesser extent their bureaucracies. It's also mostly missing in action on TPP, but I can totally understand the political need to underplay this while the other two priorities are yet to be settled. You could say that two years of reconciling the manifesto pot pourri and the exigencies of the coalition with reality set the table for prioritization while Hatoyama and Kan in their own ways made prioritization a necessity. Still, it could have been much, much worse. And the Noda administration now seems to be trending upwards even as it pushes restarts and tax hikes. He's giving the public something specific that it wants that is distinct from the actual policies that he pushes.” That’s it for now.

An Addendum of Sorts to the “Post-election” Post

The latest from the off-blog online discussions: “Ozawa's plan seems to be to get as many people lined up against the tax hike bill--the nuclear restarts are a useful throw-in--or at least on the sidelines and dare Noda to kick the nays out. Normally, a compromise can be worked out; after all, the DPJ has no precedent for doing a Koizumi on anyone, let alone enough HORs to lose the house majority. Moreover, Maehara is the most vocal and unequivocal voice on this, and he's been faced down too often on party and policy issues to be taken too seriously. Does a three month suspension for the ringleader, a shorter one for the other nays, and a verbal tongue lash for the abstainers allow everyone to save face and give Ozawa an excuse not to run in the September leadership election or what? Two problems, though. First, it'll be much easier PR-wise for the LDP and Komeito to force a snap election anyway by holding the deficit bond authorization bill hostage. Second, the DPJ won't be able to put together a coherent election platform. “All in all, it looks like a split, with Ozawa taking a good number of people with him--though many of the non-zombies won't bother to make a serious bid for office when the snap election rolls around. Given what I've seen of Noda's modus operandi, I think that he'll make a show of trying to maintain party unity but make the conditions for staying so onerous--three month suspensions minimum for all nays for starters--that Ozawa has no choice but to pick up stakes and leave. I'm not betting the farm on this because I've seen too often people with skin in the game come up with unforeseen solutions, but that is for me the most likely scenario.” There’s more to follow…

It’s a Post-election Grand Coalition… or Instability/Gridlock Followed by Party Realignment

Most of the attention from the media, political analysts and other pundits has been focused on the number of lower house DPJ members that Ozawa can muster to oppose the upcoming lower house vote on the consumption tax hike bill and whether or not the Noda administration will expel them from the DPJ when they do. There is also some talk around the number of DPJ abstentions, which is relevant to the numbers game if the Noda administration decides to kick out the nays but let the abstainers off with a suspension or less*.

The actual numbers—51/54 defections in the lower house mean that the DPJ/coalition turns into a minority there. Such a near-term outcome will certainly be significant politically, and opposition parties. The media will milk it for all it’s worth, and the consequent perceptions may very well affect the outcome of the next general election and its aftermath. However, it is near-irrelevant from an immediate legislative perspective since no legislative bills will be passed before the election without acquiescence from the LDP-Komeito tag team in the upper house.

I am surprised at how little attention is being paid to the parallel political crisis in the upper house, where one MSM report has an anonymous Ozawa capo claiming that the Ozawa group has 18 of its 30 upper members lined up to oppose the consumption tax hike when the time comes for that house to vote on the bill. Again, it is true that this will have little effect on the pre-election legislative agenda for the same reason as the defections in the lower house. But Ozawa only needs 6 upper house defectors to deny an upper house majority to a hypothetical post-election DPJ-People’s New Party-Komeito coalition. And the problem to adding more non-LDP partners to this ménage-a-trois is that most of the non-Komeito, non-LDP opposition will be running fiercely anti-consumption tax hike campaigns (and are irrelevant, as in the case of the Socialists and Communists, and/or insane, as in the case of the Happiness Realization Party). Thus, any coalition for an upper house majority that does not involve the LDP will be exceedingly hard to form—or maintain in the unlikely event that it can be done. This upper house situation will be the one known factor around the post-election circumstances that should drive a Grand Coalition—or legislative instability and gridlock, and precipitous political realignment**. There are too many moving parts in the lead-up to the lower house election to narrow the scope of possibilities. But the upper house situation lends more certainty to the likely outcomes and therefore deserves more attention.

Of course the Noda administration could as a matter of logic do a Koizumi and try to keep the upper house nays in the DPJ. But this will fail since the upper house dissidents will surely follow their lower house sibling exiles into the wilderness.

* From a purely housekeeping point of view, it makes sense for Prime Minister Noda administration hand out, say, a three-month suspension to the defectors—thus keeping them in the tent but out of the September leadership election and letting the abstainers off with a wrist slap. I don’t think that this will happen; the media fallout will be significant. Besides, the nays are likely to bolt anyway, making the Noda administration even more pathetic.

** I have an email exchange on the likely dissidents that I’ve shared with a group of academic friends and their colleagues. I may brush up my end of the exchange for later posting. I also made some observations about the MSM’s treatment of an alleged letter from Ozawa’s ex-wife containing damaging claims about his post-3.11 cowardice, which I may post later.