Recomendations for a DPJ Administration: The Sequel

I met Tobias Harris last night, when he reminded me that he had responded on his blog to this post on my blog. It did point to a serious technical error in my original comments at the very beginning, so perhaps an acknowledgement of my mistake is overdue...

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1. Oops, I forgot about the FY2009 budget. Remind me not to contest the numbers from a Japan strategist. Of course, you are right, Ms. Fink, that was not the core of my argument, which is that, basically, much of the “large pool of capital, much of which has yet to be dispensed, ripe for spending to boost the economy,” may in fact be gone or will be hard to revisit, as the DPJ says that it intends to do. To put it another way, “Mr. Hatoyama and other party leaders’ chances of boosting “their credibility by offering a more realistic stimulus plan, which will establish more concrete funding,” appears to be low and very risky as far as FY2009 is concerned simply because half the fiscal year will be gone before the DPJ can put a hold on things and another month, minimum, before it can put its own plan into action. Much of the money will be gone, or as good as gone well before the next FY.

2. I’ve always had grave personal reserves about dipping into the FX Special Account profits. The Account looks very much like the biggest second biggest carry-trade operation on the planet. Unless you ignore currency risk, I don’t understand how it can be considered less costly than borrowing from the market. Between tax revenues and government bonds, it is much closer in nature to the latter than the former. I don’t see that as “buried treasure” at all. But maybe that’s just me. (Note also that not all of the 4 trillion—in a good year!—will be available for stimulus, since a large chunk of those profits has more or less become incorporated into the annual revenue for the General Budget.) The budgetary effect of lending the money to JBIC depends on the spread between JBIC borrowing from the market and the interest rate on the loans to JBIC (LIBOR+0.3%, for 5 years, apparently). My guess is that it’s a drop in the bucket compared to the 88 trillion yen General Budget.

3. I have no quarrels about the long-term desirability of balancing the budget. I had grave doubts about the desirability, policy- and politics-wise, of your suggestion that “the DPJ should offer measurable annual targets for deficit reduction” ahead of the polling. Making up numbers out of thin air in the last ten days of the political campaign appeared not only to be a act of technocratic folly but would also put a big fat “kick me” on the DPJ butt for the LDP aim at for the next 4 years. I think I made my case sufficiently clear in the original post, but there you are.

4. Going forward, I have no objection to the points that you make here to the extent that arguments regarding FY2009, 2010 and beyond are properly distinguished.

5. A “promise to postpone indefinitely any increase in the consumption tax” is a political, not economic statement. As such, it will be judged politically. Now the DPJ has pretty much said so in exactly if not in exactly those terms (as properly translated into Japanese). I think we should agree to disagree now about the political implications of explicitly putting “indefinitely” into play while at the same time setting primary balance targets.

6. As for widening the tax base, eliminating/cutting back on special tax measures, even under revenue-neutral constraints, is technically not that difficult to do, though it will encounter political resistance from vested interests. I will not offer any substantive comments on your suggestion stricter enforcement of existing guidelines, since I know next to nothing about the laws and regulations—how strictly they are enforced, in whose favor ambiguities are resolved, and whether the tax authorities have enough underutilized human resources to make the extra effort—to guess what kind of impact such action will have on government finances, and how soon.

7. Regarding your final counterpoint, my answer: Yes, but. All op-eds, at least in media outlets for general consumption, occur within a commonly shared context (or a commonly shared set of conflicting contexts). I see your op-ed as basically a call for the continuation of the wholesale reform that Koizumi politically and Takenaka technocratically set in motion yet left woefully uncompleted—or its logical extension. But, with ten days to go between your op-ed and the election, the K-T reform had been rejected in rhetoric and manifesto by the leaderships of all the parties except perhaps the Your Party (whose tentative feelers for a post-election coalition were summarily rejected by the DPJ Secretary-General). Now, Ms. Fink, you are an economist. You have the right to say, “Well, this is the best course of action for the DPJ and possibly Japan. You comments occur within the political realm, which is not where my opinions in this instance are unfolding.” But Tobias, you are a political scientist. Do you really think that an op-ed that does not give any recognition to the basic political context into which your recommendations are being injected is appropriate? In fact, you do acknowledge the political context of your technical opinions when you write of the DPJ/Hatoyama’s “credibility.” I do not believe that you can reject the consideration of the political and likely technical difficulties and impossibilities of your recommendations and argue for their political efficacy at the same time.

That’s about it.