Here is one version of the latest report, here is another. People, don’t be surprised by this bad news. Unemployment in Japan already had fallen to about three and a half percent. So how much of a miracle could Abenomics accomplish in the first place? Not much, not even for committed Keynesians. Commentators have grown to expect so much of the Phillips curve these days, but still a mechanism for the output boost is required and the Phillips curve (at best) holds only in some contexts. Japan simply hasn’t had that many laborers to put back to work. Getting more women in the workforce, as Abe has tried to do, is a positive development, but that is not mainly about macro policy nor is it mainly about the short run.
Some of you might be thinking “well, won’t inflation cause some kind of output rise, if only by stimulating demand?” People, there is still no mechanism specified in that sentence. And you may recall, the 1970s and early 80s saw the rise of a bunch of “monetary misperceptions” theories, often stemming from the work of Bob Lucas, postulating something to that effect. It was the Keynesians who slapped them down on both empirical and theoretical grounds, as intertemporal elasticities of substitution are simply not high enough to support this as a major channel of output determination. There has been no reason since then to think those theories deserve to make a major comeback.
I noticed a comment by Alen Mattich on Twitter:
If a mere 3 percentage point increase in taxes kills Japan’s economy, got to wonder about how that 230% of GDP debt will ever be resolved.
I’m not sure 230% is the best number there, but still that is the question of the day. With the continuing circulation of what I call “the Venceremos mentality,” the limits of economic policy remain underappreciated, and the recent news from Japan should provide a sobering lesson for us all.