Fantasy Island: Takaichi’s Economic Guru Prescribes Conditions That Created 1980s Bubble

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Source: https://www5.cao.go.jp/keizai3/getsurei-e/index-e.html Note: Deeply negative gaps in 2009 and 2021 are due to the global Great Recession and Covid respectivelyTakuji Aida, the economic guru whispering into the ear of Prime Minister Sanae Takaichi, has prescribed a policy that violates the basic principles of economics. Not only is it unattainable, but the effort to carry it out is positively harmful.The most fundamental principle of economics is that everything with value comes at a cost. Even the air is no longer free, given the cost of fighting pollution. The question is whether the benefits exceed the cost. Aida, by contrast, simply denies the costs. An excessive economic boom is one of the cases where the benefits are exceeded by the costs. Excessive booms are followed by deep recessions and/or stagnation. Japan’s economic bubble in the late 1980s—when growth averaged—was followed by three lost decades (the bubble temporarily hid deep-seated structural flaws). Similarly, the derivatives/housing bubbles in the US and Europe led to the Great Recession of 2008-09 and then the 2010 Eurodebt crisis.This is why central banks try to make the business cycle as smooth as possible. Economies with milder expansions and recessions grow faster over the long haul.Ignoring these lessons, Aida proposes to recreate the conditions that led to the bubble, while insisting it won’t end in a bust. Frankly, I doubt Aida’s nostrums will even create his desired boom. So, I’m less worried about a bubble than the harm created by such efforts. Aida outlined his ideas in a January note to c…