NEW YORK – It’s been a quarter-century since Japan’s asset bubble burst – and a quarter-century of malaise as one “lost decade” has followed another. Some of the criticism of its economic policies is unwarranted. Growth is not an objective in itself; we should be concerned with standards of living. Japan is ahead of the curve in curbing population growth, and productivity has been increasing. Growth in output per working-age person, especially since 2008, has been higher than in the United States, and much higher than in Europe.
Still, the Japanese believe they can do better. I agree. Japan has problems on both the supply and the demand side, and in both the real economy and finance. To address them, it needs an economic program that is more likely to work than the measures policymakers have recently adopted – and which have failed to achieve their inflation target, restore confidence, or boost growth to the level desired.
For starters, a large carbon tax, if accompanied by “green finance,” would stimulate enormous investment to retrofit the economy. Almost surely, this stimulus would exceed the contractionary effect of money being taken out of the system and the negative wealth effect of the decreased value of “carbon assets.” The adverse wealth effect from the decrease in the value of carbon assets would be small; and, with the capital stock badly out of sync with the new price system, the investment unleashed would be large, unless there were bottlenecks in closing the gap.
In that case, the money generated by the tax could be used to reduce government debt; otherwise, it could be used to finance investments in technology and education – including supply-side measures to improve the productivity of Japan’s service sector. These expenditures could simultaneously stimulate the economy in ways that would finally pull it out of deflation.