Stiglitz Takes the Hot Seat in Japanese Tax Debate

By Chris Anstey – March 15, 2016

Bloomberg Business

In 2014, Nobel-prize winner Paul Krugman helped persuade Prime Minister Shinzo Abe to delay raising Japan’s sales tax. Now his fellow economic laureate Joseph Stiglitz is coming up to bat.

Stiglitz, who counseled against fiscal austerity in late-1990s Asia and in Europe in recent years, is scheduled to speak to Japan’s top policy makers on Wednesday. The meeting would offer the Columbia University professor the opportunity to advise against the government’s current plan to raise the sales tax to 10 percent from 8 percent, in April 2017.

The increase was supposed to have happened last October, but Abe in November 2014 became convinced the economy couldn’t withstand the bump, thanks in part to a meeting in which Krugman laid out the case against proceeding. Etsuro Honda, one of Abe’s top economic advisers, had set up the session with exactly that outcome in mind.

Fast forward 16 months, and Stiglitz will be the lone non-public official at Wednesday’s panel, which is set to include Abe, Bank of Japan Governor Haruhiko Kuroda and other cabinet members and economic advisers. The session is billed as part of Japan’s preparations for the May Group of Seven summit in Japan, to consider global economic conditions.

‘Very Pleased’

“I would be very pleased if this meeting becomes the venue for Abe to decide not to raise the sales tax next year,” Honda said in a phone interview earlier this month, before it was announced that Stiglitz would participate. “Japan has to play a role as a leading power for global growth when the world economy is looking for a driving force. Raising the sales tax isn’t what we should be doing now.”

After the Krugman-Abe meeting, Honda said that Stiglitz was another foreign expert he might have turned to.

Stiglitz was unavailable to discuss his planned presentation to the panel, according to his public-relations assistant. In 2013, the Nobel laureate had called for Japan to use its tax policy to bolster growth, not just raise revenue.

“If you very carefully tailor your tax structure you can raise money and stimulate the economy — that’s what I wished they had done,” Stiglitz said in a November 2013 interview with Bloomberg Television. One way of doing that is taxing carbon emissions, which would spur companies to buy cleaner equipment, he said. Alternatively, raising corporate taxes while lowering them for businesses that invest could be considered, he said.

Instead, Abe went ahead with the first stage of a two-step increase in the consumption levy, to 8 percent from 5 percent, in April 2014. The economy slid into a recession, and the move had what Abe and Kuroda have both said was a longer and deeper impact on consumer spending than anticipated.

Honda has variously advocated putting off the next 2 percentage-point increase until 2019, or freezing the rate.

Stiglitz is no stranger to giving governments advice. He advised Scottish independence advocate Alex Salmond that Scotland could realistically contemplate life on its own outside the U.K. He also advised Greece during that country’s turmoil, and urged Obama to deliver greater fiscal stimulus in the wake of the global crisis. He made waves in Washington in the 1990s when, as chief economist at the World Bank, he lambasted the International Monetary Fund’s strict conditions on rescue packages during the Asian financial crisis.

Choose Carefully

“If you choose the guy carefully, then you know what he is going to say,” said Richard Jerram, the chief economist at Bank of Singapore Ltd. and a multi-decade Japan watcher. “If you’re going for a brand name, Krugman and Stiglitz are two of the brand names out there.”

Jerram advocates proceeding with the increase, as Japan’s growth trend is near its potential of around 1 percent, and the job market is tightening. He predicted Stiglitz’s take will be “it doesn’t make sense to tighten fiscal policy when you have deflation.”

After Stiglitz’s panel, Abe and his team is scheduled to meet Thursday with Dale Jorgenson, a Harvard University professor who in the U.S. has advocated taxing energy use, and with former BOJ Deputy Governor Kazumasa Iwata, a prominent advocate of reflation and aggressive monetary stimulus.

Krugman himself is expected in Japan later this month, though the government hasn’t revealed whether he’ll get another audience with Abe. The economist is scheduled to appear with Vice Finance Minister Manabu Sakai in Kyoto on March 21. Another global economist coming to town: Nouriel Roubini, chairman of Roubini Global Economics and a past critic of Kuroda’s easing, who holds a press briefing Friday in Tokyo.

Click here to access the full article.