Saturday, January 07, 2012

The truth about Japan

Eamonn Fingleton has authored one of the strangest opinion pieces one is likely to come across, taking to the pages of The New York Times to defend Japan's economic model and even call for its emulation. While the virtues of Japan's economic approach may appear somewhat esoteric, Fingleton's column is best understood as part of the broader left-right debate over economic policy.

Traditionally more interventionist than the US -- Japan is synonymous with industrial policy and is the only developed country to have a higher corporate tax rate than the US (there was talk of cutting the corporate tax but I can't determine if this ever occurred) -- it is easy to see why the left is eager to defend this model against its free market critics. Indeed, perhaps this explains why Ezra Klein felt the need to highlight the column.

Fingleton begins the column by citing a variety of metrics that he claims boost the case for a surging Japan:
Japan’s average life expectancy at birth grew by 4.2 years — to 83 years from 78.8 years — between 1989 and 2009. This means the Japanese now typically live 4.8 years longer than Americans. The progress, moreover, was achieved in spite of, rather than because of, diet. The Japanese people are eating more Western food than ever. The key driver has been better health care.
Life expectancy, of course, is a product of much more than either economic growth or health care systems, with ethnicity also playing a very significant role. Asian-Americans, for example, live the longest of any ethnic group in the US, with a life expectancy of 85. Hawaii, the US state with the country's longest life-expectancy, is also home to the greatest percentage of Asian-Americans. To correct for these factors it is best to compare life expectancy in Japan not against all Americans, but against Japanese-Americans. While the average life expectancy in Japan is 83 years, among Japanese-Americans it is 84.5 years
Japan has made remarkable strides in Internet infrastructure. Although as late as the mid-1990s it was ridiculed as lagging, it has now turned the tables. In a recent survey by Akamai Technologies, of the 50 cities in the world with the fastest Internet service, 38 were in Japan, compared to only 3 in the United States.
This in indeed good for Japan, although given the regulatory hurdles in cities such as Washington DC this is perhaps unsurprising. As this Washington Post article notes, Japan's internet infrastructure also benefits from higher population density which reduces roll-out costs per customer.
Measured from the end of 1989, the yen has risen 87 percent against the U.S. dollar and 94 percent against the British pound. It has even risen against that traditional icon of monetary rectitude, the Swiss franc.
A strong currency is neither automatically good nor bad. On the positive side, it cheapens the cost of imports and make overseas tourism more affordable. However it also increases the cost of exports and selling one's goods overseas, which can be a competitive disadvantage.
The unemployment rate is 4.2 percent, about half of that in the United States.
Given Fingleton's lack of further elaboration this is rather deceptive on his part, as this is somewhat of an apples-to-oranges comparison. The Bureau of Labor Statistics explains:
Why is Japanese unemployment so low? 
Japan has been able to maintain relatively low unemployment rates because large numbers of women who are temporary or casual workers withdraw from the labor force when they lose their jobs, rather than becoming unemployed — that is, they stop working and do not look for another job. Temporary workers, both male and female, represent an increasing share of Japanese employment. Such workers generally bear the brunt of labor market adjustments in Japan. In this way, Japanese employers have flexibility in their work forces during economic downturns, enabling full-time workers with permanent employment contracts — predominantly men in larger Japanese enterprises — to keep their jobs. 
The conventional unemployment rate misses a great deal of labor underutilization in Japan, namely workers on reduced hours for economic reasons and discouraged workers (those who want a job, but are not actively seeking work because they believe their search will be futile). A more broadly defined rate which takes these other elements of underutilization into account increases the Japanese rate beyond that of the U.S. rate.
Perhaps a better metric is the labor participation rates of each country, which is the ratio between the labor force and the overall size of the population of those of working age. In the US the civilian labor force participation rate is currently 64 percent. In Japan, as of 2010 (the most recent numbers I could find) it was 59 percent -- and on a multi-year downward trend.
According to, a Web site that tracks major buildings around the world, 81 high-rise buildings taller than 500 feet have been constructed in Tokyo since the “lost decades” began. That compares with 64 in New York, 48 in Chicago, and 7 in Los Angeles.
The population of Tokyo is 13.1 million. The combined populations of New York, Chicago and Los Angeles is 14.6 million. Thus, Tokyo has built one new tower for every 162,000 residents while the US cities have built one new tower for every 123,000 residents. Why Fingleton opted for this statistic is not entirely clear. 
Japan’s current account surplus — the widest measure of its trade — totaled $196 billion in 2010, up more than threefold since 1989. By comparison, America’s current account deficit ballooned to $471 billion from $99 billion in that time. Although in the 1990s the conventional wisdom was that as a result of China’s rise Japan would be a major loser and the United States a major winner, it has not turned out that way. Japan has increased its exports to China more than 14-fold since 1989 and Chinese-Japanese bilateral trade remains in broad balance.
As with currency, the state of the current account is neither good nor bad. If the US maintained the same level of exports but then bombed and sunk all ships carrying imports to the US this would produce a big trade surplus -- but would the economy be better off? Furthermore, it is not obvious why Japan should be celebrating the fact that it sends more stuff out of the country than what it takes in. The goal of most people is to accumulate more items, not less. 

Beyond his odd and misleading statistics, Fingleton engages in some intellectual laziness by pointing out anecdotal data, some of which isn't even true:
As longtime Japan watchers like Ivan P. Hall and Clyde V. Prestowitz Jr. point out, the fallacy of the “lost decades” story is apparent to American visitors the moment they set foot in the country. Typically starting their journeys at such potent symbols of American infrastructural decay as Kennedy or Dulles airports, they land at Japanese airports that have been extensively expanded and modernized in recent years. 
William J. Holstein, a prominent Japan watcher since the early 1980s, recently visited the country for the first time in some years. “There’s a dramatic gap between what one reads in the United States and what one sees on the ground in Japan,” he said. “The Japanese are dressed better than Americans. They have the latest cars, including Porsches, Audis, Mercedes-Benzes and all the finest models. I have never seen so many spoiled pets. And the physical infrastructure of the country keeps improving and evolving.”
First off, unlike Kennedy airport which is operated by a government agency -- the NY/NJ Port Authority -- Japan's busiest airport, Narita, has been privatized. Second, despite Fingleton's claims about Dulles suffering from decay, billions of dollars have actually been spent on improvements to the airport over the past decade. 

With regard to Holstein, meanwhile, it is debatable how much can be gleaned from merely looking around. We also have no idea where he traveled -- one is surely to get a different impression of Japan from traveling to a thriving metropolis like Tokyo than other areas of the country where there is stagnation and rising poverty. It's also unfortunate that Holstein said nothing about Japanese housing. Perhaps one reason that money is being spent on items of conspicuous consumption such as clothing and spoiled pets is because the Japanese spend so much less furnishing their homes. With the average Japanese housing unit at 1,021 square feet, it is less than half that of its counterpart in the US which has 2,700 square feet

Fingleton also trots out another strange statistic to promote the idea of a revitalized Japan:
In the 1990s, while Japan was being widely portrayed as an outright “basket case,” its rate of increase in per-capita electricity output was twice that of America, and it continued to outperform into the new century.
Rate of increase of per-capita electricity output? The statistic is meaningless unless one knows the base the measurement is beginning from. If Japan begins from a much lower base, the stat loses all significance. To illustrate the point, imagine one person who makes $100,000 a year receiving a $5,000 raise, or 5 percent. Now imagine someone else who makes $1000 per year receiving a $1,000 raise, or 100 percent. Who is better off? Fortunately there is an electricity statistic that allows for a more apples-to-apple comparison: electricity consumption per capita. While the average American uses 1,460 watts per person, in Japan it's 868.

While there isn't time to rebut every silly or false point raised by Fingleton's lengthy piece, one other observation of his deserves to be highlighted:
If the Japanese have really been hurting, the most obvious place this would show would be in slow adoption of expensive new high-tech items. Yet the Japanese are consistently among the world’s earliest adopters. If anything, it is Americans who have been lagging. In cellphones, for instance, Japan leapfrogged the United States in the space of a few years in the late 1990s and it has stayed ahead ever since, with consumers moving exceptionally rapidly to ever more advanced devices.
Fingleton's remark about leapfrogging cell phone technology in the late 1990s is likely a reference to i-mode, a technology that launched in 1999 but never made it outside of Japan. However, here's what even the creator of i-mode had to say about the platform:
"I believe the iPhone (a phone that uses the traditional TCP/IP model) is closer to the mobile phone of the future, compared with the latest Japanese mobile phones."
Here, meanwhile, are pictures of Japanese lined up to purchase the iPhone 4, a foreign technology, despite Fingleton's claim that Japan has "stayed ahead ever since" in the cell phone industry. 

What a strange column. But perhaps not terribly surprising from someone who authored a book -- in 1995! -- claiming that Japan would overtake the US by the year 2000.

Update: Forgot to mention that the American Enterprise Institute held a forum on Japan this week at which Taro Kono, a member of Japan's Diet, called for deregulation and said that the country was "going downhill."

Update: Perhaps this is less of a left-right issue than I thought -- Paul Krugman also thinks Fingleton is wrong.

Update: Fingleton fires back, and I respond here.

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