RE: re: Yen still overvalued\Japanese "Keynsianism"

["Devine, James" <jdevine@xxxxxxx>]

I wrote:
>>I'd heard that the fiscal deficits were stop-and-go in nature, perhaps
being cyclical rather than structural in nature (i.e., being due to
stagnation rather than as an effort to fight stagnation). <<

Paul A writes:
> Some rough numbers illustrate:
> Budget deficit 1994: 		2.2% of GDP
> Budget deficit 2000: 		8.0% of GDP
> {IMF Country Report Japan}
>
> Don't you think it is fair to say that for most mainstream Keynesians this
represents the 'pedal to the metal' range and thus a fair test of a stimulus
package? ...

> The deficit increase came from a shift in policy stance rather than
cyclical fluctuations (Japan hasn't seen a downturn, only stagnation;
perhaps mainstream Keynesians will claim this as a victory, but politically
it is not a sustainable one).  The deficit buildup was a bit halting, but
only as one imagines these things will be as a political and economic crisis
unfolds.<

The phrase "cyclical deficit" is imperfect: it can be due to stagnation in
addition to cyclical downturns. (Anyway, didn't Japan start its stagnation
with a downturn?)

To see a structural deficit, there would have to be (1) legislated tax cuts;
(2) legislated transfer-payment increases; and/or (3) increases in
government purchases. Have these happened in a big way?

> I think it is also fair to say that Koizumi represents those who now want
to try a more neo-liberal tack. After all, over the last 25 years this is
what has happened in most countries when orthodox Keynesianism is perceived
to have failed.<

but isn't it orthodox monetary stimulus that's failed? I think that the
Koizumi approach is that of trying to reform the financial system in a way
which _ceteris paribus_ encourages deeper stagnation.

I wrote
>>If an active Keynesian fiscal stimulus program is failing, that's
earth-shaking to the Keynesian perspective. Krugman, who dismisses fiscal
stimulus out of hand, never uses the "fiscal policy has failed to stimulate
demand" line. Instead, he complains about the worthless investment projects
the Japanese government engages in (bridges that go nowhere, etc.) This
suggests that even anti-Keynesians don't see the demand-stimulus piece of
fiscal policy as ineffective. <<

> My recollection of Krugman's 'planned inflation' proposal and his analysis
is vague.  I also see him as an aggressive part of the neo-Keynsian crowd,
but you know him much better - and so so much longer ;) I do recall he
briefly explained away the failure of fiscal stimulus by saying Japan was in
a classic "liquidity trap".  Yet presumably this would mean a flat LM curve
rather than a vertical one so it didn't make sense to me.<

He's a neo-Keynesian who, like Mankiw _et al_, tries shot-gun marriage of
Walrasian general equilibrium and Keynes. His liquidity trap theory is about
the failure of monetary policy, not fiscal policy. It's not a true liquidity
trap à la Keynes: instead it refers to the fact that nominal interest rates
can't fall below zero.

>I saw his 'planned inflation' proposal as a backdoor incomes policy,...<

maybe, but his explicit story is that planned inflation raises inflationary
expectations which lowers the real interest rate which stimulates the
economy (while combatting deflation).

Jim D.