... Japanese unemployment is very low, and the economy is expanding at or above its long-term potential growth rate of around 0.5 percent to 1 percent. So according to mainstream theory, inflation would be an unnecessary and pointless negative for Japan’s economy. Why, then, are there always voices calling for Japan to raise its inflation rate?
Actually, there are several reasons. The main one is that inflation reduces the burden of debt. Japan’s enormous government debt represents the government’s promise to transfer resources from young people (who work and pay taxes) to old people (who own government bonds). Since Japan is an aging society, there are more old people than young people. That makes the burden especially difficult to bear. Young people also tend to have mortgages, the repayment of which is another burden.
Sustained higher inflation would represent a net transfer of resources from the old to the young. That would increase optimism, and hopefully raise the fertility rate, helping with demographic stabilization. It would also decrease the risk that the Japanese government will eventually have to take extreme measures to stabilize the debt.I like these paragraphs because they so neatly distill the language used by the standard policy establishment to advocate inflation. Noah clearly separates the usual "stimulus" arguments from the new "debt" argument, which helps greatly.
Debt is a "burden." Sort of like snow on your roof, debt appears from the sky somehow and then represents a "burden" requiring "lifting," which would be beneficial to all.
Debt "represents the government’s promise to transfer resources from young people ... to old people.." Apparently, the government woke up one morning, and said "we promise to grab about two and a half years worth of income from young people and give it to old people." Undoing such an ill-advised promise does indeed sound worthy.
But, lest these soothing words lull you into idiocy, let us remember where debt actually comes from. The Japanese government borrowed a lot of money from people who are now old, when they were young. Those people consumed less -- they lived in small houses, made do with fewer and smaller cars, ate simply, lived frugally -- to give the government this money. The promise they received was that their money would be returned, with interest, to fund their retirements, and to fund their estates which young people will inherit.
Noah is advocating nothing more or less than a massive government default on this promise, engineered by inflation. The words "default," "theft," "seizure of life savings," apply as well as the anodyne "transfer." I guess Stalin just "transferred resources."
Amazingly, to Noah (and the views he ably summarizes here) this "transfer" will "increase optimism." Hmm. Let's look at the evidence for that. We have seen many large inflations, which wiped out middle-class savings along with government debts. Those events have generally been regarded as economically, politically, and psychologically destabilizing tragedies, not FDR-fireside-chat "optimism"-raising sessions. No surprise that few societies have voluntarily signed up for such treatment as Noah recommends. I would be curious to hear of a single happy historical antecedent. (I mean that. Perhaps I am mistaken in my understanding of Noah's proposal. A successful example might correct me.)
How does a government default benefit young people anyway? It does so if a large amount of tax revenue is being used to pay interest or principal on the debt, and the default is accompanied by a large tax cut for young families. Not by the same level of taxes and increased government spending on more railway-to-nowhere stimulus projects. Without tax cut, there is no transfer. Noah is strangely silent on the essential big tax cut aspect of his plan.
Quiz: Find in Japanese (or American) government finances the actual "promise to transfer resources from young people (who work and pay taxes) to old people." If you say "government bonds," you (like Noah) got the wrong answer. The right answer is Social Security, Medicare, and public employee pensions. If Noah wishes to reduce the "burden" of intergenerational transfers, no matter that governments have promised to make those transfers and people have planned their lives around them, the silence on these promises is deafening.
If the purpose is default, why not just advocate default? A massive inflation also destroys private savings and wipes out private contracts. Oh wait, that's the point:
Young people also tend to have mortgages, the repayment of which is another burden.Like the government, young people too I guess woke up one day and this "burden" parachuted down on top of their surprisingly big house.
So, according to Noah, a self-induced hyperinflation to generate an economy-wide debt default is necessary... to "decrease the risk that the Japanese government will eventually have to take extreme measures to stabilize the debt." I find it hard to imagine what more extreme measures he has in mind.
One practical difficulty: Like most governments, Japan rolls over debt fairly frequently. So inflation must come really quickly if it is to wipe out debt. A second practical difficulty: The BOJ, like our own Fed, seems completely unable to induce any inflation. With advice like this, thank goodness.
Another puzzle: What exactly is the "burden" of Japan's debt? Japan's interest rates have been zero for 20 years. Japan's growth rate g, as low as it is, is larger than its interest rate r. Japan pays next to nothing in debt service. Is Noah joining the despised ranks of worrywarts like me that this can't last? But if it comes to an end, in a run on Japanese government debt and consequent inflation, then Noah gets what he wants. If it does not come to an end, Japan pays no debt service and gradually grows out of the debt. Where's the fire?
Again, this is not a post about Noah. One writes columns quickly, and space often prevents a full development of arguments. I am resolved not to discuss or even imply criticism of a writer's motives, so if you infer that, undo the inference now.
Rather, let us appreciate and dissect Noah's language, logical loose ends, insouciant willingness to upend the lives of millions, and answers in search of questions, for how well they summarize so much policy blather; and therefore not to be lulled by that blather's repetition.
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