Joseph Stiglitz’s advice for Japan

Joseph Stiglitz, a professor at Columbia University was in Japan last week. He won the Nobel prize a few years ago for his work on asymmetric information (do you remember that that is one of the causes of market failure?).  He has also been a chief economist of the World Bank and criticised its policies towards developing countries arguing that their focus on free markets harmed development in many cases.

Joseph Stiglitz, left, on March 16 attends an economic seminar in Tokyo with the governor of the Bank of Japan.

While in Japan, Stiglitz stated that Abe’s government should postpone the planned increase in the consumption tax (sales tax). Abe considers the increase to a 10% rate is necessary to reduce the large budget deficit. But Stiglitz argues that Japan now needs an expansionary fiscal policy because global demand is so weak and therefore Japan cannot rely on exports to increase aggregate demand (AD).

Stiglitz noted that Japan’s monetary policy had stimulated the economy, but that such a policy has limited effects.

If Japan’s government wants to raise more revenue, it should do it in ways that do not contract AD. He suggests “A better tax would be a carbon tax,”  as it “encourages demand because firms have to spend money to retrofit for global warming.” (Remember that a carbon tax is placed on the quantity of a firm’s emissions. Therefore it is incentivised to reduce its emissions.)

In stressing the need for an expansionary fiscal policy (demand-side approach), Stiglitz would seem to be on the Keynesian side of macroeconomic theories. It is also interesting that he mentioned the balanced-budget multiplier. “If you raise taxes and you increase spending, you design the taxes right and you design spending right, you can increase demand by a multiple, GDP by a multiple”, he said in an interview.

P.S.  Another Nobel laureate, Paul Krugman, gave similar advice this week, arguing that the sales tax increase should be postponed and fiscal spending boosted because the economy is still not strong enough to escape deflation.





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