Ezra Klein tells us that both sides are badly confused about the issues at stake in the sequester. (The piece is more appropriately headlined in the print version, “Why both sides are misreading the budget battle.”)
Klein explains that tax expenditures, like the mortgage interest deduction and the deduction for state and local income taxes, are really forms of spending. He says that the problem is that Republicans are just failing to understand this fact:
“No one has worked harder to disabuse Republicans of this misconception than top Republican economists. Harvard’s Martin Feldstein, who served as President Ronald Reagan’s chief economist, says “the distinction between spending cuts and revenue increases breaks down if one considers tax expenditures.” Former Federal Reserve chairman Alan Greenspan says they should be ‘viewed as cuts in outlays rather than a reduction in revenues.’ Greg Mankiw, who led President George W. Bush’s Council of Economic Advisers, calls them “stealth spending implemented through the tax code.”
Ezra Klein tells us that both sides are badly confused about the issues at stake in the sequester. (The piece is more appropriately headlined in the print version, “Why both sides are misreading the budget battle.”)
Klein explains that tax expenditures, like the mortgage interest deduction and the deduction for state and local income taxes, are really forms of spending. He says that the problem is that Republicans are just failing to understand this fact:
“No one has worked harder to disabuse Republicans of this misconception than top Republican economists. Harvard’s Martin Feldstein, who served as President Ronald Reagan’s chief economist, says “the distinction between spending cuts and revenue increases breaks down if one considers tax expenditures.” Former Federal Reserve chairman Alan Greenspan says they should be ‘viewed as cuts in outlays rather than a reduction in revenues.’ Greg Mankiw, who led President George W. Bush’s Council of Economic Advisers, calls them “stealth spending implemented through the tax code.”
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Wow, you’ve got to give those economists credit. As Neil Irwin tells us, they figured out that the Fed’s bond purchases affect the budget. Of course they put it on the negative side, noting that the Fed stands to lose money when it sells off its bonds at a loss later in the decade if interest rates rise as projected.
There are two important points that are worth pointing out on this one. First, the Fed does not have to sell off the bonds. It can simply hold its bonds until maturity as those of us who are a few years ahead of mainstream economists pointed out a while back.
If the Fed were to go this route, it could reach its targets for restricting money supply expansion by raising reserve requirements. This shouldn’t be that hard a concept to understand, the option appears in every intro textbook. While changing the base of reserves, rather than the money multiplier by changing the reserve requirement, is the preferred manner for the conduct of monetary policy, a set of higher reserve requirements scheduled long in advance should not be too disruptive to the banking system. We did use to have much higher reserve requirements. Also, China’s central bank routinely uses reserve requirement changes to conduct its monetary policy.
The other point that should jump out at folks is that the projected drop in bond prices, which is the reason that the Fed is projected to lose money, presents a great opportunity for the government to reduce its debt burden. The idea is that long-term bonds issued at the current low interest rates will sell at sharp discounts later in the decade, if interest rates rise as projected.
These discounted prices will give the government the opportunity to reduce its debt by hundreds of billions of dollars — perhaps more than $1 trillion — simply by buying these bonds back at lower prices. Such a move would be utterly pointless since it would not change the country’s interest burden at all, but since we currently live in a political environment where the debt to GDP ratio is an object of worship, this would be a great way to appease that god. It sure beats big cuts to Social Security and Medicare.
There is one other point about this piece that is worth noting. It tells readers:
“The great risk is that the political blowback from those losses would endanger the Fed’s independence.”
While the Fed deserves points for trying to boost the economy in the wake of the downturn it is hard to argue that the country has been well-served by an independent Fed. Greenspan at least looked the other way as the housing bubble grew to ever more dangerous proportions. Arguably, he even sought to fuel its growth as a way to recover from the collapse of the stock bubble.
The result has been incredibly disastrous with millions of lives being ruined by unemployment and the country likely to lose more than $7 trillion in output from the downturn. Could we really have done worse with a Fed that was more responsive to Congress? Perhaps, but it doesn’t seem like we have much to lose here.
Note — slight edits were made to an earlier verison.
Wow, you’ve got to give those economists credit. As Neil Irwin tells us, they figured out that the Fed’s bond purchases affect the budget. Of course they put it on the negative side, noting that the Fed stands to lose money when it sells off its bonds at a loss later in the decade if interest rates rise as projected.
There are two important points that are worth pointing out on this one. First, the Fed does not have to sell off the bonds. It can simply hold its bonds until maturity as those of us who are a few years ahead of mainstream economists pointed out a while back.
If the Fed were to go this route, it could reach its targets for restricting money supply expansion by raising reserve requirements. This shouldn’t be that hard a concept to understand, the option appears in every intro textbook. While changing the base of reserves, rather than the money multiplier by changing the reserve requirement, is the preferred manner for the conduct of monetary policy, a set of higher reserve requirements scheduled long in advance should not be too disruptive to the banking system. We did use to have much higher reserve requirements. Also, China’s central bank routinely uses reserve requirement changes to conduct its monetary policy.
The other point that should jump out at folks is that the projected drop in bond prices, which is the reason that the Fed is projected to lose money, presents a great opportunity for the government to reduce its debt burden. The idea is that long-term bonds issued at the current low interest rates will sell at sharp discounts later in the decade, if interest rates rise as projected.
These discounted prices will give the government the opportunity to reduce its debt by hundreds of billions of dollars — perhaps more than $1 trillion — simply by buying these bonds back at lower prices. Such a move would be utterly pointless since it would not change the country’s interest burden at all, but since we currently live in a political environment where the debt to GDP ratio is an object of worship, this would be a great way to appease that god. It sure beats big cuts to Social Security and Medicare.
There is one other point about this piece that is worth noting. It tells readers:
“The great risk is that the political blowback from those losses would endanger the Fed’s independence.”
While the Fed deserves points for trying to boost the economy in the wake of the downturn it is hard to argue that the country has been well-served by an independent Fed. Greenspan at least looked the other way as the housing bubble grew to ever more dangerous proportions. Arguably, he even sought to fuel its growth as a way to recover from the collapse of the stock bubble.
The result has been incredibly disastrous with millions of lives being ruined by unemployment and the country likely to lose more than $7 trillion in output from the downturn. Could we really have done worse with a Fed that was more responsive to Congress? Perhaps, but it doesn’t seem like we have much to lose here.
Note — slight edits were made to an earlier verison.
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That seems the obvious response to the comment by Federal Reserve Governor Jerome Powell on the prospect of the United States government facing a debt crisis:
“We don’t know where the tipping point is, but wherever it is, we’re getting closer to it.”
Needless to say, the concern seems more than a bit silly given the problem of unemployment facing the country and the fact that both interest rates and the interest burden of the debt are near post-war lows.
But hey, at least worrying about the debt keeps these economists employed and off the streets. We can think of it as being like Keynes tongue in cheek proposal to bury pound notes and then let people dig them up. It might be pointless activity, but in a badly depressed economy it still can create jobs and increase output.
That seems the obvious response to the comment by Federal Reserve Governor Jerome Powell on the prospect of the United States government facing a debt crisis:
“We don’t know where the tipping point is, but wherever it is, we’re getting closer to it.”
Needless to say, the concern seems more than a bit silly given the problem of unemployment facing the country and the fact that both interest rates and the interest burden of the debt are near post-war lows.
But hey, at least worrying about the debt keeps these economists employed and off the streets. We can think of it as being like Keynes tongue in cheek proposal to bury pound notes and then let people dig them up. It might be pointless activity, but in a badly depressed economy it still can create jobs and increase output.
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The Washington Post once again showed why it is known as “Fox on 15th Street” when it reported on a group of small business owners urging that Social Security, Medicare and Medicaid be protected from cuts. At one point the piece refers to plans for “overhauling the nation’s revenue-bleeding entitlement system.”
“Revenue-bleeding” does not appear to be the official name for the programs in question. Most newspapers would try to constrain their enthusiasm for cuts to Social Security, Medicare, and Medicaid and leave phrases like “revenue-bleeding” for the opinion pages.
The piece also includes the inaccurate assertion that:
“Once again, the hour is growing late for elected officials to strike a deal to avoid a potentially catastrophic blow to the economy, as the $1.2 trillion round of automatic spending cuts known as ‘sequestration’ is scheduled to commence at the end of the month.”
It is not clear what is meant by “catastrophic.” Any deficit reduction of the sort that the Post routinely advocates will slow growth and increase unemployment. The sequester cuts are no different in this respect, however the Post has usually urged these cuts and praised others for pushing such cuts. It is striking that it now seems to treat it as a fact that deficit reduction would be catastrophic.
The paper also includes an assertion from a small business owner that:
““Economists agree that sequestration would send us back into recession.”
Actually, almost no economists would claim that the sequester cuts would lead to a recession, although they would slow growth by between 0.6-0.8 percentage points in 2013.
The Washington Post once again showed why it is known as “Fox on 15th Street” when it reported on a group of small business owners urging that Social Security, Medicare and Medicaid be protected from cuts. At one point the piece refers to plans for “overhauling the nation’s revenue-bleeding entitlement system.”
“Revenue-bleeding” does not appear to be the official name for the programs in question. Most newspapers would try to constrain their enthusiasm for cuts to Social Security, Medicare, and Medicaid and leave phrases like “revenue-bleeding” for the opinion pages.
The piece also includes the inaccurate assertion that:
“Once again, the hour is growing late for elected officials to strike a deal to avoid a potentially catastrophic blow to the economy, as the $1.2 trillion round of automatic spending cuts known as ‘sequestration’ is scheduled to commence at the end of the month.”
It is not clear what is meant by “catastrophic.” Any deficit reduction of the sort that the Post routinely advocates will slow growth and increase unemployment. The sequester cuts are no different in this respect, however the Post has usually urged these cuts and praised others for pushing such cuts. It is striking that it now seems to treat it as a fact that deficit reduction would be catastrophic.
The paper also includes an assertion from a small business owner that:
““Economists agree that sequestration would send us back into recession.”
Actually, almost no economists would claim that the sequester cuts would lead to a recession, although they would slow growth by between 0.6-0.8 percentage points in 2013.
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A NYT article reporting on the fact that banks are proving much more willing to forgive debt on second mortgages than first mortgages highlighted the case of Danette Rivera, a 38-year-old single mother, who had $115,000 of second mortgage debt forgiven and is facing foreclosure by Bank of America over unpaid debt on a first mortgage. The piece told readers:
“The bank, citing customer privacy concerns, declined to comment.”
It would have been helpful to remind readers that Bank of America has no privacy concerns in discussing its general policy on debt forgiveness. While the bank should rightly have refused to discuss the specifics of Ms. Rivera’s case, it certainly could have discussed its normal practice in dealing with underwater homeowners in cases where they hold both the first and second mortgage. (It’s not clear whether that was the case in this situation.)
A NYT article reporting on the fact that banks are proving much more willing to forgive debt on second mortgages than first mortgages highlighted the case of Danette Rivera, a 38-year-old single mother, who had $115,000 of second mortgage debt forgiven and is facing foreclosure by Bank of America over unpaid debt on a first mortgage. The piece told readers:
“The bank, citing customer privacy concerns, declined to comment.”
It would have been helpful to remind readers that Bank of America has no privacy concerns in discussing its general policy on debt forgiveness. While the bank should rightly have refused to discuss the specifics of Ms. Rivera’s case, it certainly could have discussed its normal practice in dealing with underwater homeowners in cases where they hold both the first and second mortgage. (It’s not clear whether that was the case in this situation.)
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David Brooks is unhappy that:
“Voters disdain the G.O.P. because they think Republicans are mindless antigovernment fanatics who can’t distinguish good government programs from bad ones. Sequestration is a fanatically mindless piece of legislation that can’t distinguish good government programs from bad ones. Sequestration carefully spares programs like Medicare and Social Security that actually contribute to the debt problem. Sequestration will cause maximum political disgust for a trivial amount of budget savings.”
While voters may well end up being appalled by many of the Republicans’ mean-spirited budget cuts on poor and helpless people, it is hard to believe that they would be happy if the Republicans tried to cut Social Security and Medicare. These are both programs that enjoy overwhelming support among Republicans as well as Democrats.
Brooks later gives his recommendation:
“In a normal country, the politicians would try some new moves. For example, if they agreed to further means test Medicare they could save a lot of money. Democrats would be hitting the rich.”
Brooks’ proposed solution also would produce a trivial amount of savings unless he manages to hugely redefine “rich.” While rich people do makes lots of money, and therefore it is possible to get considerable amounts of revenue by taxing them, they don’t get much more in Medicare and Social Security benefits than anyone else.
When it came to repealing tax cuts, the cutoff for those who would pay higher rates was set at $400,000. If this same cutoff for being “rich” was applied to seniors, it would include less than one-quarter of one percent of people receiving benefits under these programs. That means the most we could save by taking away their benefits altogether would be a quarter of one percent of the cost of these programs. Since high income seniors already pay for a substantial portion of their Medicare benefit, the savings would be even less. The savings would be somewhat higher than one quarter of one percent on the Social Security side since the benefits of high income earners tend to be higher than average.
The only way to achieve substantial savings in these programs through means-testing would be if we applied means testing to people with income around $50,000-$60,000 a year. This would be a major redefinition of “rich.” (That’s one way to make more rich people.)
David Brooks is unhappy that:
“Voters disdain the G.O.P. because they think Republicans are mindless antigovernment fanatics who can’t distinguish good government programs from bad ones. Sequestration is a fanatically mindless piece of legislation that can’t distinguish good government programs from bad ones. Sequestration carefully spares programs like Medicare and Social Security that actually contribute to the debt problem. Sequestration will cause maximum political disgust for a trivial amount of budget savings.”
While voters may well end up being appalled by many of the Republicans’ mean-spirited budget cuts on poor and helpless people, it is hard to believe that they would be happy if the Republicans tried to cut Social Security and Medicare. These are both programs that enjoy overwhelming support among Republicans as well as Democrats.
Brooks later gives his recommendation:
“In a normal country, the politicians would try some new moves. For example, if they agreed to further means test Medicare they could save a lot of money. Democrats would be hitting the rich.”
Brooks’ proposed solution also would produce a trivial amount of savings unless he manages to hugely redefine “rich.” While rich people do makes lots of money, and therefore it is possible to get considerable amounts of revenue by taxing them, they don’t get much more in Medicare and Social Security benefits than anyone else.
When it came to repealing tax cuts, the cutoff for those who would pay higher rates was set at $400,000. If this same cutoff for being “rich” was applied to seniors, it would include less than one-quarter of one percent of people receiving benefits under these programs. That means the most we could save by taking away their benefits altogether would be a quarter of one percent of the cost of these programs. Since high income seniors already pay for a substantial portion of their Medicare benefit, the savings would be even less. The savings would be somewhat higher than one quarter of one percent on the Social Security side since the benefits of high income earners tend to be higher than average.
The only way to achieve substantial savings in these programs through means-testing would be if we applied means testing to people with income around $50,000-$60,000 a year. This would be a major redefinition of “rich.” (That’s one way to make more rich people.)
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The Washington Post ran a major PR piece for the Trans-Pacific Partnership, headlining an article with the possibility that Japan might join the pact, “Japan’s economic turmoil may provide an opening for the U.S.” As the article points out, Japan’s trade barriers to U.S. exports are already very low. It is unlikely that the Trans-Pacific Partnership will increase U.S. exports to any substantial extent.
Towards the end of the article the Post tells readers;
“With similar talks underway between the United States and the European Union, the administration hopes it can shape global intellectual property, Internet commerce and other policies in ways that work to the advantage of U.S. companies.”
This seems the main point of the trade agreement. In this sense it is misleading to tout an “opening for the U.S.” as the Post does in the headline. This appears to be a deal designed to increase the profits of U.S. corporations. There is likely to be little, if any, gain for ordinary people in the United States.
In fact, if U.S. corporations increase their profits from patents, royalties and other items in Japan and elsewhere, it could lead to job loss in the United States. If the U.S. companies get more money from abroad from these payments then it will lead to a rise in the dollar. That would reduce other exports from the United States and increase imports, thereby reducing employment in the manufacturing sector.
This piece also repeatedly refers to the deal as a “free-trade” agreement. This is wrong. An agreement that increases patent and copyright protection, which this pact would, is going in the opposite direction of free-trade, which would reduce such protectionist barriers. The Post could have saved space and increased the accuracy of the article by leaving out the word “free.”
The Washington Post ran a major PR piece for the Trans-Pacific Partnership, headlining an article with the possibility that Japan might join the pact, “Japan’s economic turmoil may provide an opening for the U.S.” As the article points out, Japan’s trade barriers to U.S. exports are already very low. It is unlikely that the Trans-Pacific Partnership will increase U.S. exports to any substantial extent.
Towards the end of the article the Post tells readers;
“With similar talks underway between the United States and the European Union, the administration hopes it can shape global intellectual property, Internet commerce and other policies in ways that work to the advantage of U.S. companies.”
This seems the main point of the trade agreement. In this sense it is misleading to tout an “opening for the U.S.” as the Post does in the headline. This appears to be a deal designed to increase the profits of U.S. corporations. There is likely to be little, if any, gain for ordinary people in the United States.
In fact, if U.S. corporations increase their profits from patents, royalties and other items in Japan and elsewhere, it could lead to job loss in the United States. If the U.S. companies get more money from abroad from these payments then it will lead to a rise in the dollar. That would reduce other exports from the United States and increase imports, thereby reducing employment in the manufacturing sector.
This piece also repeatedly refers to the deal as a “free-trade” agreement. This is wrong. An agreement that increases patent and copyright protection, which this pact would, is going in the opposite direction of free-trade, which would reduce such protectionist barriers. The Post could have saved space and increased the accuracy of the article by leaving out the word “free.”
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In an article on the impact of the sequester on the Defense Department the Post told readers:
“The $46 billion dent to the Pentagon’s fiscal 2013 budget, long considered by the brass as nothing more than a political pawn, has taken on an air of inevitability, forcing commanders across the military to plan for painful reductions and argue that American lives and livelihoods are hanging in the balance” [emphasis added].
A real newspaper would of course reserve the adjective “painful” for the opinion pages. Any budget cut will lead to job loss and displacement. However the Post is not in the habit of applying the term “painful” when budget cuts take place outside of the military.
In an article on the impact of the sequester on the Defense Department the Post told readers:
“The $46 billion dent to the Pentagon’s fiscal 2013 budget, long considered by the brass as nothing more than a political pawn, has taken on an air of inevitability, forcing commanders across the military to plan for painful reductions and argue that American lives and livelihoods are hanging in the balance” [emphasis added].
A real newspaper would of course reserve the adjective “painful” for the opinion pages. Any budget cut will lead to job loss and displacement. However the Post is not in the habit of applying the term “painful” when budget cuts take place outside of the military.
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This is the question that will be asked by readers of his column complaining that no one is listening to Morgan Stanley director Erskine Bowles and former Senator Alan Simpson. Milbank complains that Obama is only willing to cut Medicare by the $400 billion amount advocated in Bowles-Simpson’s initial plan. (Milbank mistakenly calls this the commission’s plan. The commission did not issue a plan since no plan received the necessary majority vote.) Milbank attacks Obama on these points:
“But that proposal was made in 2010, and the nation’s finances have since deteriorated.”
If Milbank had access to budget documents he would know that the nation’s finances have deteriorated because the economy has performed worse than the Congressional Budget Office had expected. In 2010, it expected that unemployment rate would average just 6.5 percent for the years 2012-2014 (Table 2-3). The country did not have a lavish spending spree or tax cutting orgy, it ran larger deficits because the economy has been weaker and needed and needs more support.
Milbank condemns the failure of Obama to support more budget cuts, and specifically more cuts in Medicare, in the face of economic weakness as being unserious. (He also condemns Republicans for being unwilling to raise taxes. Milbank’s attachment to Medicare cuts is striking since CBO’s projections for Medicare costs have actually fallen by more than the cuts originally advocated by Bowles and Simpson.
Anyhow, for Milbank it is clear that the goal is to inflict pain on ordinary people, throwing them out of work and taking away Medicare and Social Security. In the Washington Post this is the criterion for being serious.
This is the question that will be asked by readers of his column complaining that no one is listening to Morgan Stanley director Erskine Bowles and former Senator Alan Simpson. Milbank complains that Obama is only willing to cut Medicare by the $400 billion amount advocated in Bowles-Simpson’s initial plan. (Milbank mistakenly calls this the commission’s plan. The commission did not issue a plan since no plan received the necessary majority vote.) Milbank attacks Obama on these points:
“But that proposal was made in 2010, and the nation’s finances have since deteriorated.”
If Milbank had access to budget documents he would know that the nation’s finances have deteriorated because the economy has performed worse than the Congressional Budget Office had expected. In 2010, it expected that unemployment rate would average just 6.5 percent for the years 2012-2014 (Table 2-3). The country did not have a lavish spending spree or tax cutting orgy, it ran larger deficits because the economy has been weaker and needed and needs more support.
Milbank condemns the failure of Obama to support more budget cuts, and specifically more cuts in Medicare, in the face of economic weakness as being unserious. (He also condemns Republicans for being unwilling to raise taxes. Milbank’s attachment to Medicare cuts is striking since CBO’s projections for Medicare costs have actually fallen by more than the cuts originally advocated by Bowles and Simpson.
Anyhow, for Milbank it is clear that the goal is to inflict pain on ordinary people, throwing them out of work and taking away Medicare and Social Security. In the Washington Post this is the criterion for being serious.
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Most economists have names, but the NYT managed to find some without names to give critical comments on the stimulus plans of Japan’s prime minister, Shinzo Abe. An article on Mr. Abe’s plans told readers:
“Economists say Mr. Abe’s policies so far contain few of the deeper-reaching structural reforms that they say are needed to produce sustainable growth by encouraging competition in Japan’s sclerotic economy. They say the most symbolic step would be joining a Pacific-wide free trade pact that would force Japan to open sheltered domestic markets, like farm products.”
It would be interesting to know which economists have this view, because some economists, like Paul Krugman, have argued that the main obstacle to Japan’s growth is a lack of demand. They have advocated exactly the sort of expansionary fiscal and monetary policy that Abe is now advocating.
It is also worth noting that the Pacific trade agreement mentioned in this piece cannot properly be described as a “free-trade” agreement. Most of its provisions have nothing to do with trade and some involve increased protectionism, like stronger patent and copyright protections.
The piece also referred to “Japan’s already stifling national debt.” It’s not clear how it has determined that Japan’s debt is “stifling.” The interest burden of Japan’s debt is roughly 1.0 percent of GDP, roughly two-thirds the current size of the U.S. interest burden and one-third of the burden the U.S. government faced in the early 1990s. The interest rate on long-term Japanese debt is just 1.0 percent. And, it is facing deflation, not inflation.
If the debt is stifling Japan’s economy, it is not showing up in the data. If the economists cited in this article had names perhaps people could try to figure out what they meant.
Most economists have names, but the NYT managed to find some without names to give critical comments on the stimulus plans of Japan’s prime minister, Shinzo Abe. An article on Mr. Abe’s plans told readers:
“Economists say Mr. Abe’s policies so far contain few of the deeper-reaching structural reforms that they say are needed to produce sustainable growth by encouraging competition in Japan’s sclerotic economy. They say the most symbolic step would be joining a Pacific-wide free trade pact that would force Japan to open sheltered domestic markets, like farm products.”
It would be interesting to know which economists have this view, because some economists, like Paul Krugman, have argued that the main obstacle to Japan’s growth is a lack of demand. They have advocated exactly the sort of expansionary fiscal and monetary policy that Abe is now advocating.
It is also worth noting that the Pacific trade agreement mentioned in this piece cannot properly be described as a “free-trade” agreement. Most of its provisions have nothing to do with trade and some involve increased protectionism, like stronger patent and copyright protections.
The piece also referred to “Japan’s already stifling national debt.” It’s not clear how it has determined that Japan’s debt is “stifling.” The interest burden of Japan’s debt is roughly 1.0 percent of GDP, roughly two-thirds the current size of the U.S. interest burden and one-third of the burden the U.S. government faced in the early 1990s. The interest rate on long-term Japanese debt is just 1.0 percent. And, it is facing deflation, not inflation.
If the debt is stifling Japan’s economy, it is not showing up in the data. If the economists cited in this article had names perhaps people could try to figure out what they meant.
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