Modern Monetary Theory’s Reluctant Poster Child: Japan

TOKYO — Spend big and never mind the deficit. That’s what proponents of modern monetary theory, the unorthodox set of economic ideas that has inspired politicians like Bernie Sanders and Alexandria Ocasio-Cortez, see as the winning formula for American prosperity.

For proof, its admirers point to Japan. Despite the highest debt in the developed world, Japan remains an economic powerhouse with high living standards.

Japanese leaders wish they would point somewhere else.

Shinzo Abe, the Japanese prime minister, has dismissed the theory as “simplistic.” Finance Minister Taro Aso described it as “very dangerous.” And Haruhiko Kuroda, the head of Japan’s central bank, called it “extreme.”

Rather than embrace an idea that could explain or even justify the country’s situation, Japan is furiously debating it. Lawmakers to Mr. Abe’s left are citing the theory — known as M.M.T. — to denounce his plan to raise taxes on the country’s consumers. On the right, members of his own party have tried to link his policies to the theory, accusing him of running up gargantuan debts the country can never repay.

Whether Mr. Abe likes it or not, Japan is a major part of a global puzzle that modern monetary theory is intended to answer.

According to economics textbooks, when deficits grow, inflation and interest rates should grow along with them. That is not what has happened in countries like the United States that racked up huge government debt after the global financial crisis in 2008. Instead, prices and borrowing costs have remained low.

In the United States, politicians from both parties have begun to question decades of consensus that government debt is bad. President Trump’s tax cuts have widened the deficit. Proposals floated by Democrats for universal health care and investments in renewable energy could make it even bigger.

The numbers make budget hawks nervous. But proponents of modern monetary theory say they should take a deep breath. Deficits are a good thing, they say, as long as the government doesn’t create inflation by pushing the economy too far, too fast.

The idea has provoked criticism from established economists like Paul Krugman, the Nobel laureate and columnist for The New York Times, as well as Lawrence Summers, the former Treasury secretary. Government spending may be necessary when times are tough or to meet national priorities, they argue. But the bill will eventually come due. In the meantime, all of that spending could crowd out the private sector and make it harder for governments to borrow money in the form of bonds. Besides, they say, M.M.T. remains largely untested.

Proponents of the theory disagree. It has been tested, they say. In Japan.

The country is their equivalent of Charles Darwin’s Galápagos Islands: a natural experiment that reveals a fundamental truth about the way the world really works.

Since the country’s boom ended in the early 1990s, Japan has borrowed deeply. Currently, its debt level is approaching 250 percent of its annual economic output. Critics say it is an economic basket case.

Despite all that, Japanese inflation and lending rates remain low. In fact, some bond rates are negative, meaning Japan can profit when it borrows money. Its standard of living remains competitive with those of the United States and other developed countries.

Modern monetary theory explains it all, according to Bill Mitchell, a professor of economics at the University of Newcastle in Australia and one of the theory’s founders. He has been studying Japan since the 1990s.

“It is my laboratory,” he said, calling the country “a really good demonstration of why mainstream macroeconomics is wrong.”

Briefly stated, the theory holds that a country controlling its own currency like the United States and Japan cannot go broke no matter how much it borrows. Government spending puts money in the hands of people and businesses. In other words, a government deficit is effectively a private sector surplus.

“The government is not really borrowing in the sense that we think of when we borrow money,” said Stephanie Kelton, a professor of economics at Stony Brook University in New York and a leading proponent of the theory.

“We don’t walk into a bank and sit down with a loan officer and hand them the money and then ask for the loan,” she said.

CreditBethany Bickley

To spur growth, the theory says, governments should run up deficits to give consumers and companies more to spend. If leaders need more money, they can print it.

That is basically what Japan has done on and off for the last 20 years. Its economy boomed after World War II. Then the go-go 1980s ended with a bust. The economy stagnated. Deflation drove down prices and corporate profits.

Japan borrowed and spent to get growth going again. When that didn’t work, it pioneered techniques, like quantitative easing, to inject money into its financial system. The idea — basically printing lots of money and spending it on large-scale asset purchases — went on to be used by central banks around the world to deal with the effects of the global financial crisis.

The measures were necessary, but Japan’s conservative policymakers were not happy about them, according to Gene Park, an expert on the Japanese economy at Loyola Marymount University in Los Angeles, and they were soon dropped.

“The ideas came from outside of Japan, and they only tried them when they were backed into a corner,” he said.

Still, inflation did not budge. Interest rates stayed low.

Japan further embraced M.M.T.-style policies after Mr. Abe was elected prime minister in 2012. His plan, called Abenomics, called for more spending on public projects and a loose monetary policy. The economy has enjoyed modest growth under Mr. Abe, except for a brief recession in 2014.

“Mr. Abe says that Japan should not be made into a testing ground for M.M.T.,” said Takeshi Fujimaki, a Japanese lawmaker and an M.M.T. critic who is a director of the Upper House’s Committee on Financial Affairs. “But from my perspective, I’m thinking, ‘Aren’t you experimenting already?’”

Thanks to Mr. Abe’s unintentional experiment with M.M.T.-based policies, the Japanese economy is already in crisis, Mr. Fujimaki warned. Going any farther down that road will only lead to sharp inflation, he said.

But doesn’t Japan want inflation? asked Takeshi Nakano, a director in the Ministry of Economy, Trade and Industry’s information and commerce bureau, who is an outspoken supporter of the theory.

“If increasing the government’s red ink leads to inflation, then reducing that red ink creates deflation, right?” he told M.M.T.-curious lawmakers from Mr. Abe’s party during a seminar on the subject in late April, where he spoke in a personal capacity.

While Mr. Abe’s policies may resemble those put forward by supporters of the theory, they differ in one major way: Since his election, he has pledged to find a way to pay down the debts run up under his administration.

To fulfill that promise, Mr. Abe has said, he will raise Japan’s consumption tax to 10 percent from 8 percent by October. The pledge is controversial with lawmakers on both the left and right. A similar tax increase in 2014 may have pushed Japan’s already sluggish economy into recession. This time, the economy has already been weakened by China’s slowing demand for its goods.

Many in Mr. Abe’s party also oppose the tax increase, arguing that the government should address the deficits once Japan’s economic condition has improved and the country is better able to withstand the shock.

In the meantime, they fear that if Japan continues piling up debt, it will be even harder for the country to climb back out.

“A crash is going to come at some point,” said Kohei Otsuka, an opposition member of the Upper House finance committee who has warned about the country’s debt for over two decades, “and then we’ll see that M.M.T. didn’t have any merit after all.”

Pavlina Tcherneva, an associate professor of economics at Bard College in New York and part of a core group of M.M.T. theorists, said the debate demonstrated an important point: While the Japanese case may validate the ideas, there is a difference between the theory of M.M.T. and its practice.

“Japan has been the clearest case of some of the things that M.M.T. has been saying,” she said, but “that doesn’t guarantee you good policy.”

Hisako Ueno contributed reporting.

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