Japan adopts an NGDP target
By Scott Sumner
Japanese Prime Minister Shinzo Abe vowed on Thursday to raise gross domestic product by nearly a quarter to 600 trillion Japanese yen ($5 trillion), pledging to refocus on the economy after the passage of controversial security bills that eroded his popularity.
Abe unveiled the plan at a news conference marking his election to a second three-year term as ruling Liberal Democratic Party leader and hence, premier.
Abe stopped short, however, of setting a timeframe for the new GDP target, which could raise doubts about the goal.
. . .
“The goal is to create the largest economy in the post-war era to help make people’s livelihood the most affluent. I’ll make GDP worth 600 trillion yen as our clear target.”
(Actually the increase would be 20%, not 25%). There are two positive aspects to the announcement, and one very strong negative. The positive aspects obviously include the precedent of a major country setting a specific NGDP target. A second big positive is that the target is expressed as a level, not a growth rate.
But, as I’m sure you already noticed, none of this means much without setting an explicit date. Still I view this as a slight positive, despite the preceding flaw. In recent months there had been complaints from people in the Abe administration that the central bank policy was too expansionary. Some called for reducing the inflation target to 1%. If a 1% inflation target had been set by Abe in 2012 then that would have been defensible. Switching to NGDP targeting would also be defensible. But reducing a recently set 2% inflation target to 1% is a truly bizarre and silly idea. If you are going to do that, there’s really no point in having any sort of inflation target. With the implied support provided by the new $600 trillion yen NGDP target, the head of the BOJ will be able to brush off any criticism of his QE program.
In the rest of his post Marcus has a nice discussion of why target rules are superior to instrument rules.
Mark Sadowski has a guest post at Marcus’s blog, where he argues vigorously against the view that NGDP targets are less reliable than inflation targets:
Which means the claim you frequently hear that NGDP revisions are larger than inflation revisions is pure grade A horse manure. You will never see any evidence supporting this mindlessly repeated spurious claim, because no such evidence exists.
And, finally, inflation is a totally artificial construct requiring that we come up with an estimate of the extraordinary abstraction known as the “aggregate price level.” To see how preposterous this is imagine equating the aggregate price level between what it is now and what it was in say 14th century England. The goods and services are so different it requires the complete suspension of one’s disbelief.
I’m no expert on GDP revisions, although I hope others will look at this question and try to confirm Mark’s conclusion. But I love the comment on inflation since the 14th century. Any estimate of the change in the “cost of living” (living how?) since 1300 would be almost meaningless. On the other hand an estimate of the change in NGDP since that period would have a clear meaning, even if undoubtedly there’d be some measurement error.
PS. Health care is now 18% of US GDP. What was the price of “health care” in 1300? How about “education”? Cars? Cell phones? “Houses”? Gym memberships? Your gas, electric and water bills?
Suits of armor?