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.
READER COMMENTS
Roger McKinney
Aug 24 2021 at 2:33pm
And they haven’t generated any inflation.
Quite Likely
Aug 24 2021 at 5:04pm
I don’t think any MMTers claim that Japan has actually been implementing good MMT informed policies. Japan is just the go to example showing that it is in fact possible for developed countries to create much larger amounts of government debt than they currently are without any of the scare scenarios about the consequences of overspending occurring.
Scott Sumner
Aug 25 2021 at 1:36am
I was under the impression they did speak highly of Japanese policy. In any case, I don’t think they have any explanation for the Japanese macroeconomic situation.
Spencer Bradley Hall
Aug 24 2021 at 7:51pm
AD is the result of real growth and the deflator. If the deflator is growing faster than real output, then there’s stagflation. Maybe you should try being a vegetarian.
Cove77
Aug 24 2021 at 8:52pm
Maybe they need just one more Olympics
Michael Rulle
Aug 25 2021 at 9:59am
MMT is economics contribution to nihilism. I have trouble responding to anything they say.
My problem with the modern “Keynesian” is less explicitly with deficits per se, and more with the way they choose to create the deficits——increased spending. The Implication is that there is no difference in economic efficiency between government allocating spending dollars versus the private sector. We keep taking from the part of the economy which has a positive return and giving it to the part that has a negative return.
if we created the deficits not by increased spending but by decreased taxes aggregate demand would likely be better—-although we should decrease spending and tax rates.
While MMT references aggregate demand, you have discussed growth in Japan on a per capita basis given their sharp decline in population and their aging population.
As I mentioned I cannot take MMT seriously, but has per capita demand been increasing since Abe? If so what are the implications regarding their policies?
Capt. J Parker
Aug 26 2021 at 11:04am
Somewhat off topic comment and somewhat of a claim that Japan is a special case exactly as Dr. Sumner feared so, I apologize in advance. But, it is puzzling to me that when comparing advanced economies there never seems to be much effort to disaggregate the affects of population growth on GDP growth. If you assume for the moment that MMT is correct, you could spin an argument that it was Japan’s population decline that resulted in negative growth and that GDP would have fared even worse without the fiscal stimulus.
However, if you assume that market monetarists are the ones who have it right then the US seems to be embracing MMT-like fiscal liberality at exactly the moment when our working age population is shrinking as fast as Japan’s. So, near zero interest rates in the US as far as the eye can see?
Scott Sumner
Aug 26 2021 at 7:12pm
Japan’s growth in AD has been slow even in per capita terms. And the US is not about to adopt MMT.
Todd Kreider
Aug 26 2021 at 4:12pm
Per capita growth from 2000 to 2019:
U.S. 1.2%
U.K. 1.1%
Germany 1.1%
Canada 1.0%
Japan 0.8%
France 0.8%
Italy 0.0%
Japanese unemployment in the 1990s 3.2%, in the 2000s 4.8%, and in the 2010s 3.6%.
Scott Sumner
Aug 26 2021 at 7:11pm
Those figures have no bearing on this post, which discusses growth in AD, not real GDP per capita. And you forgot the 1990s.
Todd Kreider
Aug 26 2021 at 10:11pm
I didn’t forget the 1990s but that is three decades where the more relevant are the past two. If you include the 90s, it doesn’t change that much as there was strong growth the first three years.
At any rate, this post was in response to the comment that asked about GDP per capita and to your comment that Japan has had a relatively low rate of unemployment. Yeah, relatively low… 4% over the past 30 years, 4% over the pasts 20 years and 3.6% over the past decade. A low of 2% in 1990 and a high of 5.5% for two months in 2009.
Todd Kreider
Aug 27 2021 at 1:28pm
Per capita growth rate from 1989 to 2019
U.S. 1.3%
U.K. 1.3%
Germany 1.4%
France 1.2%
Japan 1.0%
Scott Sumner
Aug 28 2021 at 11:48am
Still no bearing on this post. AD has no long run impact on growth.
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