Peter DeCaprio: What are some ways governments can create policies to improve business cycles?
Here are some ways governments can create policies to improve business cycles:
1. Reduce the effects of black swan economic events through risk mitigation strategies, such as diversification in international markets.
2. Limit how much variability is allowed in key macroeconomic variables.
3. Change expectations about how these policies will be implemented over time to avoid public backlash and decrease policy effectiveness (by having politicians promise more than they can deliver).
4. Implement countercyclical policies that favor short-term inflation during downturns and long-term deflation during booms to smooth out fluctuations and prevent large bubbles and crashes (like automatic fiscal stabilizers and monetary policy tools).
5. Use aggregate demand management through national or international coordination, like discretionary fiscal or monetary policy that targets money supply growth or inflation rate forecasts, as well as tax relief or government spending during downturns.
6. Create more flexible labor market laws, including lower firing costs and higher hiring costs, to reduce the length of unemployment spells and increase hiring rates when necessary so unemployment is not a constraint on economic growth.
7. These policies have been adopted in Japan after their long-term deflationary period in the 1990s had negative effects on business cycles (and made it difficult for banks to lend).
8. Politicians create these types of under deliverable promises because they get voted into office based on hope for what they will be able to deliver. If they cannot deliver, then people will vote them out of power. Therefore, politicians must clearly communicate the limits of what can be accomplished and how they plan to accomplish what they can says Peter DeCaprio.
9. This allows for a combination of fiscal policy and monetary policy tools. Fiscal policy typically refers to government tax relief or spending on infrastructure like transportation, which would apply during downturns (to promote economic growth), as well as inflationary effects (which would encourage hiring). Monetary policy refers to increasing the money supply during downturns (to make it easier for businesses to borrow) and reducing the money supply during booms (so there is less money chasing after more goods and services). Other types of aggregate demand management that target specific sectors include wage subsidies and apprenticeship programs that favor youth employment during recessions.
10. This is advocated by Keynesian economists, who believe that full-employment should be kept even at the cost of short-term booms and busts. However, this is not necessarily realistic or best for long-term economic growth because there will always be a tradeoff between employment and inflation rates.
11. These types of labor market policies have been implemented in Germany after their reunification, where they prioritized rapid employment growth through high unemployment benefits and flexible labor markets so labor was not a constraint on their economy.
12. Abenomics was implemented by Shinzo Abe as a result of Japan’s deflationary spiral in the 1990s that included an increase in public debt from 80% to 200%. In 2013 he instituted several key reforms including fiscal stimulus using expansionary monetary policy, structural reform to improve productivity, and inflation targeting to improve price stability. He has also implemented policies that are more specific to Japan’s challenges including subsidies for women child care services, increased public spending on infrastructure, educational reform, corporate governance reform in the financial sector, and structural reform for agriculture and energy sectors.
13. Abe’s goal is achieve 3% growth by 2020. He believes that reforms will make it easier for all Japanese people to find jobs by improving labor market flexibility so hiring rates do not fluctuate with economic output as much as they have in the past. Additionally he believes his policies can increase wages through higher levels of investment by businesses due to less regulation of the financial sector which would allow banks to lend more readily.
14. Inflation targeting is a monetary policy that targets a specific level of inflation, which would help achieve price stability by supporting economic growth while reducing the unemployment rate through direct job creation.
15. Productivity refers to how much output can be produced from a given amount of inputs. Japan’s low productivity has been caused by an increase in labor market regulation and anti-competitive behaviors among business owners and workers. Abe’s goal for structural reform is to address these issues during the 2020s so productivity increases enough to support wage increases and 3% annual growth.
Conclusion by Peter DeCaprio:
Abe’s policies seek to achieve sustained 3% growth by supporting both increases in aggregate demand (inflation targeting) and labor productivity (structural reform).
The article discusses the economic policies of Shinzo Abe, which were implemented as a result of Japan’s deflationary spiral in the 1990s, and how they relate to aggregate demand and labor market policies.