Felix Salmon writes about the Japanese budget situation and observes that “The lesson here, I think, is that it’s very, very hard for a government to enact a serious fiscal adjustment unless and until the bond market forces its hand.”
Well, I agree. But I’m less depressed about the whole thing than Salmon is. I mean, really, why would it be the case that governments enact serious fiscal adjustments when the bond markets aren’t forcing their hand? What I actually find remarkable is the quantity of media and political whining that goes on about the fact that countries don’t do this. Normally, though, we expect human beings and the organizations they run to respond to incentives. If people cease wanting to buy Japanese debt, then the Japanese government will find ways to issue less debt. But demand for Japanese debt is high, so why wouldn’t the government keep issuing more?
That’s not to say these endless debts are optimal policy for Japan. What they ought to be doing is trying to have more economic growth. Finance their government with a bit less debt and a bit more printing of yen. That’ll create elevated inflation expectations and spur growth. More immigrants wouldn’t hurt either. I think the real mystery is why unconstrained governments are so reluctant to really put the pedal to the metal.