In past discussions about the meaning of negative monetary shocks and continuous subpar monetary policy management, Japan has been used as example of the economic effects of extreme inflation targeting where the implied target is an asymmetrical zero percent. In Q2 of 2013, the BoJ changed tactics in order to “break the back of deflation” and assumed a target of two percent.
Recently, in discussions about the macro conditions in the United States, some have asserted that there’s more of structural component to the low growth phenomenon, perhaps a combination of demographics and subpar supply side policy. Since these things are more than likely true of Japan as well, though I believe their demographic issue is more acute, I hopped on FRED to take a look at their GDP figures.
It is interesting to note that from this graph it appears that Japanese GDP has defied the trend, achieving 2.5 percent growth, in addition to pushing unemployment down 70 basis points between the points in time when the BoJ began monetary intervention to end deflation and early 2016 when it changed tactics, apparently giving up on its goal of 2 percent inflation, ushering in a trend of GDP deescalation. The GDP deflator is up 0.4 percent between 2013 and the end of 2016.
It is a rather curious situation then to have the argument that monetary policy in the US is “about right” and growth problems are related to structural factors continuing to resurface, when juxtaposed with the Japanese experiment, n informative demonstration of what the monetary on-off switch looks like under similar conditions, poses some grounds for doubt. This argument does not respect short and medium term monetary impact on realization of potential.
There recently has been no shortage of debate about the economic effects of immigration, with a large body of the mainstream academics claiming that immigration doesn’t cause displacement within the labor force, and I look at this claim and the one about demographic causes for low growth as if they are connected. If I were to suppose that monetary policy is managed with an inflation ceiling rather than a symmetrical target, which recently appears to be more the rule rather than the exception, the claim that there is no displacement as a result of immigration doesn’t appear to be valid. Rather, under these monetary conditions, a constant equilibrium in the labor force is maintained that results in below potential utilization by necessity and adding more people to the labor force then does not translate to more growth.
The assumption that added dollars merely contribute to inflation is only true when the economy is at potential and demand for dollars is saturated, and open immigration policies imply more potential. If money growth is constrained as to cap NGDP at some level below three and a half percent to support a low inflation ceiling, and equilibrium is maintained at that level, we’ve stopped accommodating changes in money demand as a general rule, and the economic pie is then relatively closer to zero-sum. It is really hard to miss the longer run trend of appreciation of the dollar and its implication for how well the central bank is accommodating money demand, and what that implies in terms of principles everyone thought were reliable during the Great Moderation, but no longer are due to changes in the monetary policy framework over the last decade or so.
So what I think about the entire immigration debate is that if you want to roll out the welcome mat, then monetary policy should be managed in such a way as to render the demagogic rhetoric of xenophobes more false than true and we aren’t currently doing that. If that isn’t going to happen, and it doesn’t look like a change is anywhere on the horizon, then the people who want this need to have a “come to Jesus” moment regarding the trade offs involved with the macro environment the inflation ceiling creates. Do we want to simply rearrange the deckchairs on the Titanic, or do we want more than that?