Comments on Takahiro Miyao
Craig Freedman (Professor, Macquarie University, Australia)
This comment originally appeared in the "Japan-U.S. Discussion Fourm" (http://lists.nbr.org/japanforum) on May 17, 2003: posted here with the author's permission.
I'm not sure that there is any evidence that households would simply save all of an income tax cut. This seems at odds with the fact that household saving rates have steadily fallen these last few years. Japanese households seem to react to changes in wealth and income in rather predictable ways.
I wonder if focusing on deflation (like focusing on inflation) is simply wrong headed. They are symptoms of problems with the basic economy. Recalibrating a thermometer doesn't cure the patient.
Now I know that Takahiro Miyao does think that pushing up asset prices is simply the most effective way to boost aggregate demand. I wouldn't deny the connection. Living in Australia I certainly have seen the connection between real estate prices and aggregate demand. However, I can't see that government intervention of this sort is the way to approach the aggregate demand problem. I have no problem with changing taxes and regulations on real estate or shares. It's the idea of purchasing assets that I am dubious about. Under such a plan, the BOJ for instance buys shares by creating money. Banks gleefully sell shares and use the money to buy government bonds. If the economy recovers, nominal interest rates rise and the banks are hit with a smaller capital base. If the economy doesn't recover, then it is hard to see the point of the asset swap. I have similar problems with purchasing real estate. Perhaps I am too much of a microeconomist, but I can't see the transmission mechanism that will allow this to work. I want to see in whose hands the assets will go and the effect that these changes are likely to have on the economy.
One last thought, the US government under Roosevelt tried to inflate the economy to move out of the depression. Didn't work. Assured aggregate demand caused by the US entrance into WWII did. Germany found this out long before that.