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The unsung success of Japan’s recent fiscal policy

Summary:
The media tends to dwell on bad news. Even when something is a smashing success, say Germany’s 2004 labor market reforms, the reporting is relentlessly downbeat. The same is true of Japan’s recent fiscal policy, which has finally brought the national debt under control.  The debt to GDP ratio has leveled off at roughly 240% of GDP since the 2014 tax increase: Better yet, this fiscal austerity was associated with an extremely strong labor market, not at all the “disaster” predicted by Keynesian economists: But that doesn’t stop the media from continuing to insist that the fiscal austerity was a failure. Here’s the Financial Times, discussing the planned October increase in Japan’s national sales tax, from 8% to 10%: After the disastrous economic impact in 2014,

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The media tends to dwell on bad news. Even when something is a smashing success, say Germany’s 2004 labor market reforms, the reporting is relentlessly downbeat. The same is true of Japan’s recent fiscal policy, which has finally brought the national debt under control.  The debt to GDP ratio has leveled off at roughly 240% of GDP since the 2014 tax increase:

The unsung success of Japan’s recent fiscal policy

Better yet, this fiscal austerity was associated with an extremely strong labor market, not at all the “disaster” predicted by Keynesian economists:

The unsung success of Japan’s recent fiscal policy

But that doesn’t stop the media from continuing to insist that the fiscal austerity was a failure. Here’s the Financial Times, discussing the planned October increase in Japan’s national sales tax, from 8% to 10%:

After the disastrous economic impact in 2014, when the tax went up from 5 to 8 per cent, the government has prepared a series of countermeasures.

“Disastrous”?  But at least the FT is hedging its bets this time around, as the article is entitled:

I’ve been repeatedly insisting that those fears were groundless.  That’s not to say a recession cannot occur at some point, but it wouldn’t be caused by fiscal austerity.

The actual policy disaster occurred in 2008, when the Bank of Japan’s tight money policy led to a sharp fall in NGDP.  Fiscal policy (and also severe real shocks like the 2011 tsunami) don’t have much impact on employment.

Scott Sumner
Scott B. Sumner is Research Fellow at the Independent Institute, the Director of the Program on Monetary Policy at the Mercatus Center at George Mason University and an economist who teaches at Bentley University in Waltham, Massachusetts. His economics blog, The Money Illusion, popularized the idea of nominal GDP targeting, which says that the Fed should target nominal GDP—i.e., real GDP growth plus the rate of inflation—to better "induce the correct level of business investment". In May 2012, Chicago Fed President Charles L. Evans became the first sitting member of the Federal Open Market Committee (FOMC) to endorse the idea.

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