A few more thoughts on Japan.

The bad growth news shows, pretty clearly, that the consumption tax hike was a big mistake. It also shows, by the way, how weak the market monetarist argument — which is that fiscal policy doesn’t matter, because central banks can always achieve the nominal GDP they want — really is; do you seriously want to contend that Kuroda likes what he sees, that he isn’t trying as hard as he can to boost Japan out of deflation?

Beyond that, the Japanese story is another example of the damage wrought by the rhetoric of fiscal responsibility in a depressed economy.

Leave on one side the expansionary austerity nonsense. Even among relatively sensible people, you often encounter calls for a strategy that couples loose fiscal policy, maybe even stimulus, in the short run with measures to address long-run sustainability. So, let’s spend on public works now while also addressing entitlement and/or tax reform to stabilize the budget picture over the next few decades. This sounds reasonable; in a better world it actually would be reasonable. But in this world it ends up producing very bad results.

Why? In practice, political systems (and politicians) have limited ability to focus. If you give them a mixed message about stimulus now but long-run cuts, the urgency of the stimulus part gets lost, and in fact the practical result is generally austerity even in depression.

So it was with Japan. The IMF advised Japan to go ahead with consumption tax hikes, while also endorsing monetary and fiscal stimulus. But as I’ve pointed out already, putting fiscal sustainability up near the front of a report on a country engaged in a very difficult attempt to escape deflation undermined the message, and led to a tax hike that was not effectively offset.

One way to say this is that when people come out with a message along the lines of “We must address fiscal sustainability while supporting short-term recovery,” the message that actually comes across is more like

Photo

So why blur things this way? The usual answer is still that unless you address the long-term issues, you might have a loss of confidence that undermines recovery. This is, however, unlikely — both because the fiscal consequences of a delay are small and because losing confidence would actually be a good thing in this situation.

I have to admit that the Fund’s role here somewhat surprises me. The IMF is in general making a lot of sense on macro issues these days, and is well aware of the dangers of deflation. So I had hoped it would be more sensitive to the risks of responsibility rhetoric in this case.

But anyway, another lesson from Japan — the country that has offered many useful lessons to the West, none of which our policymakers have been willing to learn.