Saturday, June 30, 2012

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.

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.”

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.

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