Is Krugman Responsible For Delay In Japan’s Tax Hike?

November 23, 2014 0 Comments

Krugman is no stranger to the limelight, being more celebreity than economist, after all. He already has plenty of sway in much of the western world (whoever that is willing to listen to his rethoric), and now Bloomberg reports that the noble prize winning economist met with Japanese Prime Minister Shinzo Abe (Abe Shinzo for those in the western world) for 40 minutes. What was the meeting about? A couple of days ago, I wrote about the Triple Dip Recession Japan is currently experiencing, their Abe’s ultimate decision to delay the next round of tax hikes in the nation. Apparently, this decision can be attributed to none other than Paul Krugman.

As written previous, Abe was planning on increasing the size of these sales taxes sometime in December, which is approaching in two weeks. As noted, they are planning on increasing those taxes sometime next year.

When Japanese economist Etsuro Honda heard that Paul Krugman was planning a visit to Tokyo, he saw an opportunity to seize the advantage in Japan’s sales-tax debate.

Honda, 59, an academic who’s known Abe, 60, for three decades and serves as an economic adviser to the prime minister, had opposed the April move and was telling him to delay the next one. Enter Krugman, the Nobel laureate who had been writing columns on why a postponement was needed.

Honda succeeded in organizing a 20-minute meeting between the prime minister and the U.S. economist. It went about double the allotted time.

“That nailed Abe’s decision — Krugman was Krugman, he was so powerful,” Honda said in an interview yesterday in the prime minister’s residence, where he has an office. “I call it a historic meeting.

Krugman plays down his role, saying the Nov. 6 meeting with Abe “was very straightforward.”

“He had questions and I hope I answered them clearly,” Krugman said in a telephone interview yesterday. “I told him the kinds of things I’ve been writing — I hope I made a good case. What effect it had on him is unknown to me. He’s certainly not going to blurt out ‘I’m sold.’”

Following Abe’s Nov. 18 decision to postpone next year’s tax increase by 18 months, Krugman said: “I’m happy to see what they’re doing.”

Hamada, who had advised Abe on his pick for Bank of Japan governor, said that “Abe listened to Krugman’s view very carefully.” Hamada said in an interview Nov. 18 that “he probably helped the prime minister make up his mind.”

“He said we should be cautious this time in raising the sales tax and if we weren’t it would break the back of the economy,” Abe said. “He said if that happened, we wouldn’t escape deflation, it would be uncertain whether we could revive the economy and repair the nation’s finances. I think that’s the case.”

Of course, most people already understood that the sales tax was doing more harm than good, even Paul Krugman, so why this meeting happened later rather than sooner is beyond me. He could have saved us some much needed anticipation in wondering whether or not Abenomics was good for economic growth. What I want to know is why anyone would really need a Noble Laurete in Economies to understand the effects of increasing sales taxes in a very weak economy? Its obviously a very stupid thing to do; of course if you make retail items artificially more expensive, people will buy less of them. Besides, there was really no need for the government to engage in tax hikes. Increasing revenue streams could have actually waited until the recovery gained more strength. With the nation’s debt 230 percent of GDP, I think it was far to late for any meaningful budget reforms, and any increase in overall revenue would have essentially been a drop in the bucket.

However, my gripe isn’t with the sudden influential change in policies advocated by Paul Krugman. Its his position regarding the deflation Japan is desperately trying to fight against (highlighted in bold). Abe’s testimony doesn’t quite explain why Krugman was utterly silent on the VAT (Value Added Tax) tax increase from 17% to 20% maximum on most consumer goods and anywhere from 0 – 5% on everything else (depending on the item). In fact, he outright implied that the higher VAT resulted in UK inflation

But, say the small-[output]-gap people, if Britain is deeply depressed relative to potential, we should be seeing deflation, whereas there’s actually inflation. Is this a decisive argument?

Well, the great bulk of UK inflation these past few years reflects one-off factors: VAT increases, commodity prices, and import prices. Domestically generated inflation is low, and headline inflation is declining too.

So if I have this right, apparently both higher consumption taxes can result in both inflation and deflation at the same time. Your guess is about as good as mine, but the answer begs an elaboration.


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