Economic Lessons Unlearnt

by Kevin D. Williamson
Everybody loved Abenomics until five minutes ago.

The economy of Japan, long stagnant, has taken a sharp turn for the worse: It contracted nearly 7 percent (annualized and inflation-adjusted) in the quarter ending in June. By way of comparison, consider that the U.S. contraction in the quarter ending in June 2009, when we were feeling the worst of the financial crisis, was 4 percent; the worst quarter of the 1982 recession saw a contraction of 2.6 percent. You’d have to go back to the 1940s to see a quarter with a 7 percent contraction in the United States.

That atrocious quarter may be a sign of very bad things to come for Japan, or it may turn out to be a fluke. The cause of that contraction in the view of most Japan observers was a substantial increase in the country’s consumption tax, rising from 5 percent to 8 percent — with consumers, knowing that a big tax hike was coming, moving forward purchases, contributing to more positive numbers in the last quarter and despair-inducing numbers in this one. The consumption tax is scheduled to rise to 10 percent next year.

“Abenomics,” the stimulus-oriented economic program put forward by Prime Minister Shinzō​ Abe, has — or had — many admirers in the United States, especially on the Democratic side of the aisle. Paul Krugmanholding up Abenomics as a model, described Japan’s policy as the only operating alternative to the “economic defeatism” of the West: “Nobody else in the advanced world is trying anything similar,” he wrote, though he was befittingly cautious, offering his judgment on it as “So far, so good.”

Matt Yglesias, identifying “important lessons for us,” declared that Abenomics “seems to be working” and praised Abe for having “brushed off the doubters and plunged ahead with new fiscal stimulus,” “leading the path forward to recovery.” Mr. Yglesias’s headline writers were even more confident than he was: Slate heralded the “Triumph of Abenomics,” called it “The Salvation of Japan,” and eschewed caution almost entirely: “Prime Minister Shinzo Abe’s bold recovery strategy is working.”

Adam Posen of the Peterson Institute for International Economics, in a generally positive assessment of Abenomics, argued in February of this year that Japan should incorporate an even steeper increase in its consumption tax: “Raising the consumption tax to 10 percent, and dangerously suggesting that it might be postponed, is not sufficient. There needs to be a multi-year commitment to raising the consumption tax to the neighborhood of 20 percent.” Mr. Posen has an interesting take on the conflicting views about Japanese economic policy: The Abe-doubters, he said, are “leftovers,” people without sufficient intellectual talent to have moved on to greener pastures as demand for Japan experts subsided in recent decades. As an example of how arguments are constructed at Mr. Posen’s level, he is worth quoting at length:

A number of the best Japan specialists have moved on to other issues — people with transferrable skills transferred and those without them remained. The unfortunate impact of this is that much of the press coverage is dominated by this group of leftover people who are very cynical about Abenomics and Japan.

It’s a little different in my community: Economists who have worked on Japan in the past. Among this group, which includes central bankers from around the world, there is huge excitement and admiration for what the Bank of Japan (BOJ) is doing. An overwhelming majority of central bankers are very strongly supportive of what the BOJ is doing and very impressed with how they are doing it. Broadly speaking, Abenomics has strong support from the central banking community.

Such non-argument arguments go on and on. Dean Baker of the Center for Economic and Policy Research, another Abenomics triumphalist, declared that Japanese policy represented the ascent of “sound economic policy” over “scare stories about debt and deficits.” All the best evidence, he was confident, supported this view: “At this point, America’s deficit hawks are jumping up and down screaming that the boost to Japan’s economy is just a ‘sugar high,’ and that it will soon face a horrible collapse as payback. Of course, anything can happen in the future, but we just don’t see any real evidence of the deficit hawks’ doom story as of yet.”

Revisiting Abenomics, Professor Krugman considered the argument that the Japanese approach would play out differently if enacted in the United States. Perhaps “considered” is too strong a word: He merely wrote that he couldn’t think of any reason, and demanded of critics: “Show me the model.”

“Show me the model” is an interesting choice of words. The modelers estimated that Japan’s quarter would be even worse than it was: The consensus estimate compiled by the Wall Street Journal called for a 7.1 percent contraction. Since the emergence of economics as a profession associated with mathematical models, we have been promised, with varying degrees of confidence, that certain policies would produce certain outcomes as predictably as an object falling in a vacuum will accelerate at 9.8m/sec2 under Earth gravity. But none of them seems to work.

Why?

 

Perhaps the problem is ideology or crass political calculation, but that seems unlikely: Politicians, especially presidents, tend to be much more committed to their own political careers than to any congeries of abstractions. If there were some set of reliable policies that would create predictable, steady, strong growth, and all of the salubrious effects on wages and employment that one would hope for, then it seems likely that it would have been implemented by now. Assume, arguendo, that Barack Obama’s apologists are correct, and that his policies would be working much better if not for the fact that the Republican party controls one-half of one-third of the government. Why did they fail to implement those policies when they had uncontested control? Why did Republicans fail to, when they enjoyed complete control of the federal government? There is so much to be gained from a strong economy, and so little to be lost in disappointing ideologues in one’s political coalition, that it is very difficult to understand why “the right policies” have not been enacted if they are known. It’s not as though the White House cannot locate Professor Krugman’s telephone number.

More likely, the science writer David H. Freedman is correct when he argues that “economic models are always wrong,” that the process of calibrating models to account for historical and current data renders them very, very precise and very, very useless. This is another example of the mapmakers’ dilemma: In order to be manageable, models must, by definition, be simplified versions of the real world, and the more simplified they are, the less accurate they are. There is no economics version of the all-seeing Laplace’s Demon. Professor Krugman’s demand — “Show Me the Model!” — assumes the usefulness of the model, which cannot, in fact, be assumed.

There is no obvious reason to believe that successful economic policies are transferable from country to country. Indeed, it may be that “successful” policies in the main merely coincide with happy economic outcomes rather than causing them. There is not much reason to believe that they are transferable from year to year, much less from generation to generation, in spite of the moanings of our phantom armies of New Deal romantics. Economic conditions change very quickly and in ways that are impossible to predict.

The battle against scientism in economics is a long one. I am afraid that it is also is a losing one. F. A. Hayek, in his Nobel lecture, dropped an Austrian hammer on “The Pretense of Knowledge” in his profession, but the tendency of economists to present their theories as a kind of fiscal physics has, if anything, intensified since Hayek’s time, abetted by the rise of a distinctly phony school of political rhetoric dressing up familiar prejudices as “empirical” and “evidence-based.”

I’ll bet you your next unemployment check that if Japan continues to slide, the answer from the Left will be: “Abe was on the right track, but he didn’t go far enough. And here’s my model proving it. I’m only following the evidence.” But the evidence suggests that there are a lot of moving parts to an economy, and that their relationships are unpredictable. Perhaps Japan benefits from stimulus, but stimulus adds to debt, which in Japan is very heavy — higher, proportionally, than in Greece. That can be offset by tax increases, as with the consumption tax, but those have effects on economic behavior. You might have three balls in the air at the same time, but that doesn’t mean you’re juggling.

The first issue of evidence we should consider is whether there is any evidence that large, complex economies such as those of Japan or the United States are in fact manageable through the blunt instrument of politics. If there is a political constituency for a 6.8 percent contraction in the Japanese economy, it is not obvious what it is. If there is a political constituency for the current state of the U.S. economy, especially the stagnation of middle-to-low-income wages, that is equally non-obvious. All the best people were convinced that Shinzō Abe had it figured out — and, by coincidence, he was putting forward policies very similar to the ones they themselves prefer. That’s evidence of something, too: the human capacity for self-delusion, one of the few commodities to which the economic concept of scarcity does not apply. 

— Kevin D. Williamson is National Review’s roving correspondent and the author of The End Is Near and It’s Going to Be Awesome.

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