HIKONE, SHIGA PREFECTURE – On March 16, a government panel called the Analysis Meeting on International Finance and Economy held its inaugural session. A briefing paper on the panel, released by the Cabinet Secretariat on March 1, stated: “In order to properly cope with the prevailing global economic conditions, Japan, as the chair of the Group of Seven summit to be held in May, will hold a series of meetings to hear opinions from and exchange views with knowledgeable persons from Japan and abroad on the economic and monetary situations of the world.”
The members of the panel are seven Cabinet members and the governor of the Bank of Japan. They meet behind closed doors. A summary of minutes was released only for the initial session.
Preparing for the G-7 summit by inviting such authorities on the international monetary situation as Nobel laureates in economics as guests is only ostensibly an official purpose.
It has been broadly speculated that the true intention of the government is to use the panel’s meetings as an arena for finding excuses to postpone the consumption tax rate increase from 8 percent to 10 percent that is scheduled for April next year.
The guest speaker at the first session was professor Joseph E. Stiglitz of Columbia University, reputedly the most influential economist in the world. A leader of left-wing liberal economists, he has persistently criticized disparity in income distribution, which has widened rapidly in the United States since the mid-1980s.
The reason why the government invited Stiglitz even though his ideology is diametrically opposed to that of Prime Minister Shinzo Abe perhaps was its expectation that he would without fail back the idea of shelving the consumption tax hike, the hidden purpose of the meeting, from the standpoint of opposing tight fiscal policy.
The title of Stiglitz’s lecture given at the closed session was “Beyond the Great Malaise and Financial Stability towards Robust and Sustainable Growth.” His 48-page PowerPoint slide presentation, released by the Cabinet Office on its website, makes no mention of pros or cons about the consumption tax increase. But generally speaking, it concentrates on presenting basic criticism of the prime minister’s Abenomics policy.
It should be noted that in the Japanese translation of the PowerPoint presentation, which was distributed at the meeting, contained a number of what appeared to be deliberate mistranslations and ambiguous sentences.
Perhaps either because Japanese reporters wrote on the basis of the Japanese translation or because they were not well-versed in economics, their news reports missed the crucial points of Stiglitz’s lecture and reported as though he strongly supported a postponement of the consumption tax hike.
For Stiglitz and others who oppose tight fiscal policy, not only would a consumption tax hike be unacceptable but reducing the corporate tax rate would also be inappropriate because corporate tax cuts would do little to stimulate corporate capital investments.
Stiglitz calls for creating demand by raising the rates of environment, property and inheritance taxes, and for using the increased tax revenues thus attained for fiscal spending to further stimulate demand.
In other words, he believes that additionally stimulating demand through fiscal spending financed by increased tax revenues gained through the kind of tax hikes that have the effect of creating domestic demand is the robust and sustainable fiscal policy that should be adopted to put an end to what he calls “the Great Malaise.”
For example, a higher environmental tax should serve as an incentive for households and businesses to spend more on measures designed to save energy and electricity.
By “Great Malaise,” Stiglitz means sluggish economic growth, a rise in unemployment (including latent jobless people like young irregular employees in Japan), lopsided concentration of the fruits of economic growth in the high-income bracket and stagnant wages for people in the low-income bracket.
Since the global financial crisis of 2008, the U.S. economy has experienced a decline in employment of people in the productive age population, a growing inequality in income and wealth distribution. The real wages of people in the lowest income group are now below the level of six decades earlier and the unemployment rate of young African-Americans is nearly 25 percent.
There is no doubt that the 2008 crisis triggered the Great Malaise of the world economy. Today the balance sheets of banks and major corporations have been restructured and it has become much easier for them to raise funds. Why is it then that businesses are not eager to make investments? The answer is simple and can be expressed in one phrase: global shortage of demand.
Several factors can be cited as causes of demand shortage on the global scale. First, the eurozone is still being hit by a protracted economic slump. Second, while countries, businesses and households with dwindling income are being forced to spend less, those with rising income are not increasing their spending adequately. Third, the Chinese economy has slowed down. And fourth, although the falling oil prices are supposed to have stimulated demand for other goods and services in oil-importing countries, the demand stimulation has been more than offset by falling demand in oil-exporting countries.
This situation has no doubt been brought about by the changes to the market economy rules that Japan, the U.S. and European countries started pursuing during the early 1980s — such as tax reforms benefiting the wealthy and promotion of liberalization based on market fundamentalism. Contrary to what was generally expected, these changes caused slow economic growth and economic instability and inequality.
In an attempt to overcome the Great Malaise dating back to the 2008 international financial crisis, the U.S. Federal Reserve Board launched a large-scale quantitative easing of its monetary policy. According to Stiglitz, however, there has never been a case in which a monetary policy has turned out to be effective when the economy is in a serious recession. The only tool that is effective during such a recession is fiscal policy.
Not a small number of people argue that the effectiveness of monetary policy is limited because interest rates cannot go lower than zero. But even if a negative interest rate is put into effect, it will not only make little or no contribution to economic recovery but also will produce serious side effects.
Those who are dubious about the effectiveness of fiscal stimulus are concerned first and foremost with a rise in sovereign debts. They also assert that the fiscal stimulus measures taken in the 2008-2009 period proved ineffective.
Stiglitz counters by saying that all those arguments are completely false. Fiscal measures are aimed at nothing but narrowing the gap between supply and insufficient demand. Fiscal programs can be determined to be effective only when they have stimulated domestic demand and narrowed the supply-demand gap.
Had governments not taken fiscal measures between 2008 and 2009, the unemployment rate would certainly have become higher and the overall economy much more stagnant.
Those who say that the fiscal measures at that time were not effective are making the wrong comparisons. They should make comparisons with the jobless rate that would have prevailed in the absence of the fiscal packages.
As seen above, Stiglitz concludes that the easy money policy of unconventional dimensions as adopted by the Bank of Japan is harmful and of no use, and he dismisses the theory that reducing corporate tax rates would stimulate capital investment. He recommends fiscal stimulus to further increase domestic demand through the utilization of increased tax revenues from the types of tax hikes that generate demand as a robust and sustainable means to put an end to the global Great Malaise.
Takamitsu Sawa is a distinguished professor at Shiga University.
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