Turning Japanese

Related article here. My own posts on Japan here.

Following Japan's footsteps

One of President Obama's economic advisers, Laura Tyson, seems to have a strange affinity for failed Japanese policies. In 1989 she co-authored The Politics of Productivity: The Real Story of Why Japan Works, a book which could be interpreted as a moderate endorsement of Japan's use of strategic trade policy. Japan's approach was essentially a form of dirigisme in which the government promoted the rise of certain economic sectors that it believed held the key to future prosperity.

Describing herself as a "cautious activist" on trade policy Tyson describes her approach in the book as the following:

Cautious activism has implications for domestic economic policy as well as for trade policy. A cautious activist supports general policy measures such as a more generous R&D tax credit and increases in public funding for civilian R&D and education -- initiatives that would promote all of the nation's high-technology producers without singling out any one of them for special favor. But a cautious activist is willing to go further, recognizing that measures to support particular technologies or industries are sometimes warranted.

To determine when such measures are required and what form they should take, the government needs an institutional capacity to monitor and respond to trends in global competition. Without such a capacity, America's policy has often been too little, too late, While we scramble to help our producers address crises that have been long in the making, both Japan and the European Community have forward-looking policies to nurture their high-technology industries. The American approach is no longer adequate, particularly at a time when cutbacks in defense R&D programs threaten to decimate public funding for science and technology unless new civilian programs are established to replace them.

Of course only a few years after this book was published Japan went into a decade-long period of economic torpor while the Europeans played second fiddle to a booming U.S. economy that was riding the wave of a booming technology sector. This should be kept in mind when politicians advocate policies to promote alternative/green energy technology, which the conventional wisdom holds is the next great source of American economic growth.

Also disconcerting is Tyson's recent talk of the need for a second stimulus package, citing the $787 billion version passed earlier this year as "a bit too small." Japan, of course, engaged in a series of 10 spending packages between 1992 to 2000 for which all they had to show was a mountain of debt -- currently at an astonishing 170 percent of GDP. This futility, however, has not stopped the Japanese from pushing yet another series of spending packages.

Let's hope that we don't proceed down a similar path.

The Japan lesson

You hear a lot more talk about Japan these days. More specifically there is a re-examination occurring of Japan's economic performance in the 1990s.

In the early 1990s Japan's economy collapsed in the wake of an asset bubble during which time both its stock and housing markets saw massive increases. Indeed, at one point real estate was so out of whack that the Imperial Palace in Tokyo was said to be worth as much as the entire state of California. Even if nothing more than a myth that still captures the state of things pretty well. Its stock market, meanwhile, has declined from about 39,000 in 1990 to under 8,000 today.

Japan's government wanted to fix the problem but, like most governments, wasn't interested in solutions that involved sacrifice or difficulty. Instead Japan adopted a policy of spending lots of money on infrastructure and adopting a loose monetary policy where interest rates were literally zero to encourage borrowing and investment. "Zombie banks" were kept afloat with government funds.

You will notice some similarities between this approach and the one we are adopting today. It is therefore imperative for liberals such as Paul Krugman to defend Japan's approach, because if we expose its obvious errors it raises big questions about current policies that President Obama is promoting. That's rather hard to do since Japan has the most debt of any first world country, a country with anemic economic growth since about 1990 and a electorate that is thoroughly despondent over its leadership. (Junichiro Koizumi, who ran on a reform platform was the only leader to serve more than a couple years in the past two decades while the current Prime Minister has an approval rating of 15 percent)

Just how desperate the left is to defend Japan's record became starkly apparent to me this morning when I read this letter to the editor in today's New York Times from a senior fellow at the Tellus Institute:

Re “When Consumers Cut Back: An Object Lesson From Japan” (front page, Feb. 22):

The so-called Lost Decade in Japan raises an interesting question: What exactly was lost? Recycling bath water to do laundry. Plummeting sales of whiskey. Dramatic reduction in car sales.

Contrary to the prevailing dark assessment of Japan in the 1990s, these changes sound like a country shifting its consumption habits for the better, living within its means and reducing its environmental footprint.

Dependence on ever-expanding consumerism to fuel an economic recovery is not only undependable; it is also unsustainable.

Perhaps the current recession is a time for American consumers to rethink what well-being really means. The words of one Japanese college student are telling: “I just want a humble life.”

Allen L. White
Boston, Feb. 23, 2009

These people are recycling bath water and this is an example to uphold?

Japan's stimulus experiment

Infrastructure spending to revive the economy? Japan's been down this road before:

Japan’s rural areas have been paved over and filled in with roads, dams and other big infrastructure projects, the legacy of trillions of dollars spent to lift the economy from a severe downturn caused by the bursting of a real estate bubble in the late 1980s. During those nearly two decades, Japan accumulated the largest public debt in the developed world — totaling 180 percent of its $5.5 trillion economy — while failing to generate a convincing recovery.

...In the end, say economists, it was not public works but an expensive cleanup of the debt-ridden banking system, combined with growing exports to China and the United States, that brought a close to Japan’s Lost Decade. This has led many to conclude that spending did little more than sink Japan deeply into debt, leaving an enormous tax burden for future generations.

...Economists tend to divide into two camps on the question of Japan’s infrastructure spending: those, many of them Americans like [Treasury Secretary] Geithner, who think it did not go far enough; and those, many of them Japanese, who think it was a colossal waste.

Among ordinary Japanese, the spending is widely disparaged for having turned the nation into a public-works-based welfare state and making regional economies dependent on Tokyo for jobs. Much of the blame has fallen on the Liberal Democratic Party, which has long used government spending to grease rural vote-buying machines that help keep the party in power.

The topic is covered more deeply in the excellent book Dogs and Demons: Tales From the Dark Side of Japan. From an economic perspective dumping tens of billions in building infrastructure makes little sense. From a vote buying perspective, however...

The new new deal

After much speculation Obama has released the outline of his economic recovery plan that, according to Politico, is based on:

ENERGY: “[W]e will launch a massive effort to make public buildings more energy-efficient. Our government now pays the highest energy bill in the world. We need to change that. We need to upgrade our federal buildings by replacing old heating systems and installing efficient light bulbs. That won’t just save you, the American taxpayer, billions of dollars each year. It will put people back to work.”

ROADS AND BRIDGES: “[W]e will create millions of jobs by making the single largest new investment in our national infrastructure since the creation of the federal highway system in the 1950s. We’ll invest your precious tax dollars in new and smarter ways, and we’ll set a simple rule – use it or lose it. If a state doesn’t act quickly to invest in roads and bridges in their communities, they’ll lose the money.”

SCHOOLS: “[M]y economic recovery plan will launch the most sweeping effort to modernize and upgrade school buildings that this country has ever seen. We will repair broken schools, make them energy-efficient, and put new computers in our classrooms. Because to help our children compete in a 21st century economy, we need to send them to 21st century schools.”

BROADBAND: “As we renew our schools and highways, we’ll also renew our information superhighway. It is unacceptable that the United States ranks 15th in the world in broadband adoption. Here, in the country that invented the Internet, every child should have the chance to get online, and they’ll get that chance when I’m president – because that’s how we’ll strengthen America’s competitiveness in the world.”

I'm a bit underwhelmed. While making public buildings more energy efficient seems admirable enough, it strikes me as rather desperate when Obama brags about how many people will be employed screwing in lightbulbs. With regard to schools I think our main problem there are far more deep rooted than inefficient heating systems or a lack of cutting edge computers. Is this really the reason that children in less developed countries regularly kick our butts on international standardized tests?

Expanded broadband access is fine -- depending on how this is done. If Obama promotes a revamp of government policy that encourages more competition that's one thing, but if taxpayer dollars are being spent so that little Jimmy can play Medal of Honor online I fail to see how that will boost the economy. Ditto for medical records.

These are all rather marginal measures, with the real meat of the proposal found in the proposed infrastructure spending, er, "investment." The thing about spending on roads and bridges, etc. to boost one's economy is that this has already been tried by Japan without much success as Amity Schlaes points out:

The spending yielded painfully little for the rest of the economy. The Nikkei stayed down. The country's standard of living failed to keep pace with the rest of the world's. The average Japanese's purchasing power had been moving closer to that of the average American, Ronald Utt of the Heritage Foundation has noted. But in the 1990s the Japanese saw few advances. The gap between America and Japan widened again.

Worst, though, was the failure on jobs. Unemployment fell in many nations in the 1990s. In Japan, the '90s were a lost decade: The unemployment rate more than doubled and surpassed the U.S. rate -- an unthinkable occurrence just a few years earlier.

Even today, Japan is having trouble climbing out of its cement pit. At its high, in the mid-1990s, infrastructure spending accounted for 6 percent of its gross domestic product, double what the United States allocated for infrastructure in the '90s and still higher than what politicians are considering spending today. In estimates of national debt, the world's second-largest national economy is near the top of the list, perched between Lebanon and Jamaica. Last year, Japan's public debt was far greater than the size of its economy, a burden that makes its demographic challenges more difficult to address.

For a more in-depth look at this topic I would recommend the excellent book Dogs and Demons. The lack of job generation is only the most obvious defect in Japan's enormous infrastructure spending, with other results including increased corruption in government (typically kickbacks on contracts), "white elephant" projects that are not only unused by now must also be maintained and environmental degradation.

Indeed, the book discusses how national parks were paved over with roads that went unused, and in one example how concrete barriers placed on beaches to halt erosion were actually later found to speed up the process.

They say the definition of insanity is doing the same thing over again while expecting a different outcome. From the looks of things our sanity is about to be tested.

Infrastructure spending has its uses and there are plainly areas of the country where growth is being held back because of it. But such projects should take place after much deliberation and planning -- simply pouring concrete for its own sake is the answer to nothing. And it's not as if Washington hasn't already dispensed plenty of money for roads and bridges, with $500 billion spent over the past five years.

Really bold action here would be taking a look at the earmark process, in which political concerns rather than actual infrastructure needs determine where money is spent. So far I haven't heard much from Obama here.

To truly improve the competitive position of the U.S. we should be willing to look at areas such as tax reform, systemic changes on education policy and market-based health care reform that de-links coverage and employment. But that's a lot more difficult than changing the lightbulbs in our public buildings.

This doesn't strike me as the bold change people had hoped for.

Krugman and the deficit

Fresh off the heels of his recent Nobel prize New York Times columnist Paul Krugman says that the government ought to be spending more of your money:

If Barack Obama becomes president, he won’t have the same knee-jerk opposition to spending. But he will face a chorus of inside-the-Beltway types telling him that he has to be responsible, that the big deficits the government will run next year if it does the right thing are unacceptable.

He should ignore that chorus. The responsible thing, right now, is to give the economy the help it needs. Now is not the time to worry about the deficit.

That deficit that he so blithely dismisses, incidentally, could reach the neighborhood of $750 billion next year according to the director of the Congressional Budget Office. Looking past the deficit when Democrats are in charge, of course, is nothing new for the New York Times columnist, as this piece from December 2006 demonstrates:

Now the Democrats are back in control of Congress. They’ve pledged not to be as irresponsible as their predecessors: Nancy Pelosi, the incoming House speaker, has promised to restore the “pay-as-you-go” rule that the Republicans tossed aside in the Bush years. This rule would basically prevent Congress from passing budgets that increase the deficit.

I’m for pay-as-you-go. The question, however, is whether to go further. Suppose the Democrats can free up some money by fixing the Medicare drug program, by ending the Iraq war and/or clamping down on war profiteering, or by rolling back some of the Bush tax cuts. Should they use the reclaimed revenue to reduce the deficit, or spend it on other things?

The answer, I now think, is to spend the money — while taking great care to ensure that it is spent well, not squandered — and let the deficit be. By spending money well, Democrats can both improve Americans’ lives and, more broadly, offer a demonstration of the benefits of good government. Deficit reduction, on the other hand, might just end up playing into the hands of the next irresponsible president.

In the long run, something will have to be done about the deficit. But given the state of our politics, now is not the time.

And by "the state of our politics" you can bet he means having Democrats in charge of the country's purse strings. After all, this is the same Paul Krugman that regularly excoriated President Bush and Congressional Republicans for the deficits under their watch. They don't call him America's most partisan columnist for nothing. Besides the partisanship angle, what really upsets Krugman was that the deficits under Bush could be at least partially attributable to that bane of liberal economists everywhere, tax cuts. You think I am joking? This is from a column written in mid-2004:

Why, then, do we face the prospect of huge deficits as far as the eye can see? Part of the answer is the surge in defense and homeland security spending. The main reason for deficits, however, is that revenues have plunged. Federal tax receipts as a share of national income are now at their lowest level since 1950.

A giveaway that Krugman is spinning here is that he refuses to quote actual budget revenue figures and instead resorts to speaking of them in the context of "share of national income." Well, let's look at what the Congressional Budget Office had to say about tax revenues in the 2003-06 time span:

Growth in Federal Tax Revenues From 2003 to 2006
Total federal revenues grew by about $625 billion, or 35 percent, between fiscal year 2003 and fiscal year 2006. CBO’s analysis of that increase in revenues since 2003 is necessarily preliminary because relevant data are not yet fully available. CBO examined the available data using the commonly employed method of analyzing the sources of revenue growth as a percentage of GDP. Had revenues grown at the same rate as the overall economy between 2003 and 2006, federal receipts would have increased by only $373 billion. The other $252 billion of the actual increase in revenues represents growth in excess of GDP growth. As a result, receipts as a share of GDP rose from 16.5 percent in 2003 to 18.4 percent in 2006, an increase of 1.9 percentage points (see Table 1, attached).

So, basically, Krugmam is full of it.

Furthermore, one can't help but note that while Krugman bashed Bush for cutting taxes in early 2001 during the onset of a recession that he justifies increased government spending now even in the face of an already massive deficit because of...a recession. So really what it comes down to is that if the government lets you keep more of your own money to help stimulate the economy then that's bad, but if the government itself directs where that money is spent then that's good.

What's more bizarre and infuriating about Krugman's Keynesian prescription to solve the country's economic ills -- increased government spending -- is that it is a formula that mirrors that of Japan during the 1990s. Krugman has to know this, having written extensively about Japan's economy. The result of all that spending? As a recent New York Times column says:

What came next for Japan was depressing but far from a depression. There were no miso soup lines and the relatively low official unemployment rate often seemed to belie that there was a problem at all. But Japan seemed out of miracles. The economy would grow a little, then stop, then contract a little. Countless bridges to nowhere were built, but all the spending on infrastructure failed to lift the nation out of its doldrums.

A column in The New Republic sounds a similar note:

The government also started plowing money into the public sector to keep the economy alive. "The additional spending was largely directed toward public works projects, shoring up a weak financial system, and subsidies to the weakest of Japan's businesses, which, in retrospect, ought to have been allowed to fail," writes American Enterprise Institute economist John Makin. "While the direct stimulus of government works projects and subsidies to weak businesses kept the economy from falling back into negative growth for a time, the weakness resumed once the direct stimulative effects of the spending packages wore off."

I would note incidentally that this is exactly the formulation that Obama appears bent on pursuing, having voted for the financial bailout, pushing for additional infrastructure spending and loan guarantees for weak businesses such as the auto sector.