MMT and Japan
By Scott Sumner
It’s good to see that others are beginning to notice a problem with Modern Monetary Theory:
Over the past 30 years, Japan has had by far the slowest growth in aggregate demand for any major developed economy over a similar period. Some might argue that Japan has not done all that poorly, with its relatively low rate of unemployment. But that’s even worse for MMT, which is a model that views aggregate demand as all-important and is almost completely dismissive of supply-side economics.
Even worse, the one brief bright spot in the picture occurred after Abe took office in 2013 and did exactly the opposite of what MMTers advocate, tightening fiscal policy, reducing the budget deficit, and relying on monetary stimulus. For a few years, aggregate demand actually grew at a decent pace. Paul Krugman explains why in this paper.
The Japanese case is also a problem for old-style, unreconstructed Keynesians, who believe that fiscal policy is the answer when interest rates hit zero. Japan ran some of the largest deficits in human history, and got basically zero growth in aggregate demand as a result.
I fear that people will misread this post, and tell me why the Japanese case does not apply. That’s not the point. I’m not the one touting the Japanese case in support for MMT; it’s the MMTers themselves. It makes me wonder if they understand their own model.