Scott Sumner  

Mood affiliation and the success of BOJ policy

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Bryan Caplan recently applied Tyler Cowen's mood affiliation hypothesis to global warming. Here's Tyler:

It seems to me that people are first choosing a mood or attitude, and then finding the disparate views which match to that mood and, to themselves, justifying those views by the mood. I call this the "fallacy of mood affiliation," and it is one of the most underreported fallacies in human reasoning. (In the context of economic growth debates, the underlying mood is often "optimism" or "pessimism" per se and then a bunch of ought-to-be-independent views fall out from the chosen mood.)
Over at TheMoneyIllusion I recently discussed the amazing success of the Bank of Japan's shift to a more expansionary monetary policy in 2013. Prior to the change, the GDP deflator had been trending downward at 1% per year for almost two decades. Over the past two years it's been rising at 2% per year. Unemployment has recently fallen to the lowest level in decades, and labor force participation is rapidly surging upward, to all time highs.

In the comment section, HL linked to two graphs (here and here) that showed how Japan's fiscal situation is also improving rapidly. I had always believed that deficit reduction was the strongest argument for monetary stimulus in Japan (unemployment was already pretty low), but I underestimated the benefits in that area. I expected at least a slight upward bump in interest rates. Instead, rates have stay low so that the rise in NGDP has been an unambiguous blessing. Even better, the monetary stimulus fully offset the negative effects of a rise in taxes, allowing NGDP growth to rise sharply even while needed fiscal contraction was reducing the deficit.

So why hasn't this generally been viewed as being a huge success?

1. Fashionable intellectual pessimism. I must admit that I initially fell prey to this one. I expected some gains, but also thought they'd fall short of their goals (based on low bond yields). Perhaps they still will fall short, but so far it's been a smashing success. (Other market monetarists such as Lars Christensen and Marcus Nunes have been ahead of me on this issue.)

2. Both liberal and conservative economists have recently invested a lot of intellectual capital in the concept of central bank policy ineffectiveness at the zero bound. This is not exactly the same as generalized pessimism about policy experiments, as liberals still think fiscal stimulus works, and conservatives still think that supply-side reforms work. But since these were not done in Japan (to any significant extent) most economists were very skeptical of Abenomics. Liberals worry about the liquidity trap, whereas conservatives worry both about the zero bound issue and the "Fisher effect" that theoretically should result from higher inflation (but did not in Japan.) Wage stickiness meant that more NGDP meant more jobs, and the zero bound allowed the BOJ to raise expected NGDP growth (and inflation) without raising nominal interest rates. That's a free lunch!

Perhaps mood affiliation explains why most economists have not embraced the idea that the BOJ's monetary stimulus has been a smashing success. It would force them to revise the way they think about a wide range of issues. It seems too good to be true.

For those who are inclined to dismiss the success of Abenomics, it's always possible to find some excuse, if you look hard enough. Economies are almost infinitely complex, and there will always be some misleading data points that once can snatch out of the air to claim failure. The two I see most often are the phony "recession" stories, and the low rate of CPI inflation.

Because Japan's working age population is falling very rapidly (and indeed much more rapidly since 2013 than before, and because productivity growth is very slow, the trend rate of RGDP growth in Japan is extremely low, perhaps near zero. That means that roughly one half of the time Japan's RGDP will fall, even if the central bank does a near perfect job. (Recall that the central bank doesn't control working age population or productivity.) Thus while the BOJ has done a near perfect job, and improved all the variables that it can influence, Japan still has other problems. It's not nirvana. Skeptics will latch onto these other unrelated problems.

The second phony issue is the CPI inflation, which has recently been quite low, similar to the US and the eurozone. The difference between the CPI and GDP deflator, is that the CPI includes shocks to imported oil prices that are largely beyond the BOJ's control. But even being similar to the US and eurozone could be viewed as a huge success, as before Abenomics Japan's inflation rate was far below US and eurozone levels. Under the previous monetary regime Japan would now be experiencing 1% or 2% deflation.

To summarize, the purpose of the BOJ's monetary stimulus was to fix two dysfunctional sectors, the labor market and the public debt. I was skeptical that the gains in employment would be very significant, because Japan already had a quite low unemployment rate. But the policy seems to have produced substantial job gains, more than I expected, despite a rapidly falling working age population. And the monetary stimulus has reduced the debt burden by raising NGDP, and also by allowing the fiscal authorities to do needed tax increases, without any cost from the "austerity" in terms of higher unemployment.

These are things that most economists thought were impossible. Unfortunately most still do, as it's easier to ignore Japan's stunning success than to revise one's view of how the world works. The biggest problem in economics is not that the field is too technical (although it is) but rather that most economists do not pay enough attention to the real world. When talking to other economists, even elite economists, I'm often stunned at how little they know about the stylized facts of the real world. (This criticism does not apply to most economics bloggers, or to those in policy roles like Bernanke and Yellen.)

PS. To his credit, Paul Krugman was somewhat optimistic about Abenomics. Do his fans understand this?

Comments and Sharing

COMMENTS (9 to date)
ThomasH writes:


Economists affiliate with pessimistic-ish moods as a professional trait. It's basically our cultural role to explain that there is a trade-off for everything. VERY seldom do we find a situation in which things are so bad in exactly the wrong way that a single measure will be better on every dimension. NGDP targeting is no different. Compared to the existing interest rate ceiling policy, it would have resulted in higher inflation, and that is anathema to those of a certain mind-set.

marcus nunes writes:

Another "mood" that needs revising. It is pervasive among FOMC members. An example from Stanley Fischer:

“I’m not very worried,” Fischer told an audience at the Council on Foreign Relations. “The lower inflation that we’ll get from the lower price of oil is going to be temporary.”

He also said lower oil prices were “a phenomenon that’s making everybody better off.”

Njnnja writes:

And at some point the critics are going to start saying that Japan's economy is *too* good and therefore must be a bubble. Why can't intellectuals just lighten up a bit?

John writes:

I think it would make a great paper:

"Abenomics: Literally the best thing ever." Sumner et al., (2016).

In all seriousness, economists should discuss the real world in a rigorous manner, with a higher standard of discourse than blogging (although blogging certainly has its place!). Perhaps this could make an interesting idea for a journal? Something like "Economic perspectives on contemporary policy"?

BC writes:

"This criticism does not apply to most economics bloggers, or to those in policy roles like Bernanke and Yellen."

Interesting observation. Bloggers and policy makers frequently interact with people that are not academic economists, people that will discuss events going on in the real world. Could this be part of the reason?

Lorenzo from Oz writes:

Isn't Abenomics just the flip side of Irving Fisher's Debt-Deflation story?

Nick writes:

As long as we're on the subject of mood affiliation, any chance for an update on Greece? It seems so recently that American economists were expert on the political problems of this small nation and considered them worth several posts a week. What happened?

Scott Sumner writes:

BC, Yes, that's part of it.

Lorenzo, To some extent, although the transmission mechanism from debt problems to deflation is probably less operative under a fiat money regime.

Nick. The interest in Greece was primarily motivated by the perceived impact of Greece on the Eurozone, and indeed the global economy. It no longer seems to have much impact, but I suppose it could return at some point.

I'll watch for some articles on that subject.

Jose Romeu Robazzi writes:

When I first came accross the ideas of market monetarism I was worried about Cantillon effects of monetary policy. But prof. Sumner has argued repeatedly that Cantillon effects are minor. He also has argued that when money demand is increasing (and money velocity is going down), "doing nothing" in terms of monetary policy is in fact a (passive) adoption of a tightening monetary policy stance. I think anecdotal evidence is in his favor. Prof. Sumner has also argued that positive inflation may allow for a faster adjustment in the labor market, but labor market has improved everywhere even with very low (or zero) inflation. Considering these anecdotal evidence, I ask, maybe very low inflation is not a problem and we should target constant NGDP growth, adjusted for working population, even if that target implies zero inflation ...

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