Japanese Prime Minister Shinzo Abe is doing the right thing by seeking to delay the next rise in consumption taxes. This is good economic policy, and also a fairly new experience for me – I met with a national leader, made a case for the right policy, and he’s actually doing it! (Of course, there were many other people making the same case.)
But there’s a lot of skepticism, which on the whole is justified: Mr. Abe is trying to accomplish something very difficult, and it’s by no means clear whether the instruments he’s deploying are sufficient.
Still, there’s one type of criticism that I really, really hate, for Japan and elsewhere – and I hate it especially because it’s one of those things that is so completely accepted by Very Serious People that they don’t even realize that they’re spouting a dubious hypothesis rather than speaking The Truth. I refer to the claim that Japan doesn’t need to boost demand, but needs structural reform.
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What are we talking about here? Traditionally, structural reform was offered as an answer to the problem of stagflation (a combination of high inflation and high unemployment). If your economy starts to overheat through accelerating inflation, despite quite high unemployment, then the argument was that this was due to labor market rigidities – basically a euphemism for a system in which it’s hard to fire people or slash their wages – and that to allow better performance you needed to make the labor market more flexible (i.e., more brutal).
O.K., this argument makes a fair bit of sense, although even when the problem is stagflation it’s less ironclad than conventional wisdom would have you believe. There’s always been reason to believe that much “structural” unemployment is actually the result of hysteresis – of the lasting damage done by prolonged recessions. Still, at least this was a coherent argument.
But Japan isn’t suffering from stagflation; neither is Europe. They are, instead, suffering from low inflation or deflation, and persistent shortfalls in demand despite zero interest rates.
Why, exactly, is structural reform supposed to help cure this problem?
Indeed, the kind of structural reform that people have mostly talked about in the past – making labor markets more flexible, so that it’s easier to cut wages – would, if anything, deepen the slumps. Why? The paradox of flexibility: Falling wages and prices increase the real burden of debt, depressing demand further.
In fact, if you think about it, there’s a definite snake-oil feel to calls for structural reform, which is touted as a universal elixir: It cures inflation, but it cures deflation too! Also back pain and bad breath.
Now, there might be some kinds of structural reform that would do Japan some good. For example, changes in land use or building-height regulations that would allow for more infill in Japanese cities could spur investment, and help increase demand. But the point is that the blanket call for “structural reform” as the answer is intellectually lazy and destructive. Not only would much of what we call structural reform hurt rather than help, declaring that the problem is structural also causes policymakers to take their eye off the ball, since what Japan needs right now, more than anything else, is to escape from deflation any way it can.