At the Cabinet Office’s special session of the Council on Fiscal and Economic Policy, in which I am a participant, Modern Supply-side Economics (MSSE) was taken up as a new concept of economic policy. This was originally named by US Treasury Secretary Janet Yellen as the economic agenda of the Biden administration at the World Economic Forum in January 2022. Specifically, this concept includes boosting potential US growth, expanding labor supply and promoting improvements in infrastructure and education.
The term "Modern" is added for the purpose of distinguishing it from traditional supply-side economics, which was the economic agenda for the Reagan administration in the 1980s.
The traditional concept advocated that if the economy grows under a private sector initiative and with economic policies centered on tax reduction and deregulation, profits of investors and other wealthy people will naturally trickle down to lower and medium income groups. On the other hand, in MSSE, the government is to play a certain role in efforts for enhancing value-added productivity, such as digitalization, fostering of startup companies, and improving workers' skills, and at the same time, take measures to redress income disparities.
Modern Money Theory (MMT), which became popular in recent years, also advocates the management of the economy through government-led positive fiscal policy instead of merely depending on the private sector (market). However, MMT prioritizes the scale of demand in the macro economy, while MSSE focuses on the supply side and the productivity thereof. These theories are decidedly different in this regard.
Generally, economic policies are categorized into short-term economy-boosting measures that exert influence on the demand side, including consumption and investment, and medium- to long-term growth policies for promoting the supply side. In Japan, where a deflationary economy has continued (demand has remained below supply), economic policies have been biased toward measures enacted to stimulate demand, such as expansion of government spending, with the aim of eliminating deflationary gaps.
As a result, policies are apt to place a greater focus on scale. Of course, the government has used its growth strategy to stimulate the supply side in the past. Although the economic policies have aimed for a growth strategy, in reality they were actually only economy-boosting measures to prop up demand.
For example, companies' R&D activities serve as the driving force for growth through innovation. However, increases in R&D investment have been seen as equivalent to positive evaluations in terms of the effects of the R&D taxation. Investment itself is made on the demand side in the macro economy. Increases in investment do not necessarily bring about growth if they lack effects.
In the meantime, what matters from the perspective of MSSE is the enhancement of value-added productivity through innovation. Also, with regard to wage hikes, merely stimulating consumption by raising wages is not very different from conventional demand policy. Unless labor force participation and productivity improvement are promoted, wage hikes will not exert an influence on the supply side. As long as productivity remains low, Japan's growth potential will not increase sustainably.
Under the policy known as the "New Form of Capitalism," the Kishida administration is aiming to create a virtuous cycle of growth and distribution. As part of the initiative, the administration launched a project to support startup companies and reskilling of workers.
However, in order to ensure that the new form of capitalism truly satisfies MSSE, it is necessary to shift the aims of economic policies from elimination of supply-demand gaps (stimulation of demand in the macro economy) to issues on the supply side, such as technological innovation, startups, and the labor force participation rate. Surely now is the time to make a shift from economic policies that are focused on scale and merely aiming to stimulate demand, which have expanded budget deficits, to those that embrace wise spending to enhance productivity and growth potential.
* Translated by RIETI.
April 15, 2023 Weekly Toyo Keizai
