Monday, February 4, 2013

Robert Samuelson Takes the Wrong Lessons From Japan

     For 20 years Japan has been something of a enigma being the object of a lot of analysis and soul searching. Krugman's revised "liquidity trap" paper back in 1998 was about Japan. It was a cautionary tale: if the LT could happen in Japan, why could it not happen here?

   Indeed, the argument is now made that it has indeed happened here, just with higher unemployment. Then again, there's a literature that argues that maybe Japan's not so bad after all: if you go by per capita income they don't look so bad. I'm always somewhat wary of per capita arguments; I mean Sumner is always telling us that liberals shouldn't worry about median income being flat over the last 30 years, as, well, median income doesn't matter, only consumption per capita does. Then, of course, he tells is that we should eliminate all income and corporate taxes and tax only consumption. So, I'm always skeptical of per capita arguments seeing where a Sumner can take them.

   Still, the point about Japan is well taken: the real problem there is mostly about lack of population growth and a declining birth rate. Of course that's the one thing you won't see Abe do to stimulate the economy-encourage more immigration.

    Robert Samuelson, as quintessential example of what Krugman calls a "deficit scold" is at it again, this time holding up Japan as an example of fiscal policy run amok.

   "The lesson is that huge budget deficits and ultra-low interest rates — the basics of stimulus — have limits and can be self-defeating. To use a well-worn metaphor: Stimulus becomes a narcotic. People feel better for a while, but the effect wears off. The economy then needs a new fix. Too many fixes may spawn new problems (examples: excessive debt, asset “bubbles,” inflation). That’s already happened in Japan."

   "It’s caught in a trap. On the one hand, it needs stimulus to grow. On the other, the debt from past stimulus measures threatens future growth. About 95 percent of government debt is held by Japanese investors — banks, insurance companies and pensions — that have been patient, report economists Takeo Hoshi and Takatoshi Ito. If investors lose patience and balk at buying government debt, the economy could implode. But their patience presumes that annual deficits will someday shrink. The trouble is that the required tax increases or spending cuts could act as a drag on the economy. Already, the Diet has voted to raise the consumption tax in 2014 and 2015 from 5 percent to 10 percent."

    "Considering this, Japan isn’t an attractive place for private investment. A declining population reinforces the effect. Katz of the Oriental Economist suggests spurring growth by dismantling protections for sheltered domestic industries. Higher growth would emerge as “inefficient firms die [and are] replaced by better firms.” But Japan’s leaders have generally shunned this complex and contentious approach. Once the present stimulus fades, Katz writes, it’s likely “Japan will fall back to stagnation.”

   "The United States isn’t Japan. The American economy is more flexible and entrepreneurial. The natural gas and oil boom is a godsend. Housing is reviving. Still, similarities with Japan loom. Growth rates have been stubbornly low. Both countries rely on stimulus policies — cheap credit, big deficits — to cure problems that are fundamentally structural and psychological. The parallels are worrying."

     Samuelson does concede that in the short term, stimulus is sometimes necessary:

     "Stimulus policies have been the substitute. To combat deep recessions, they’re justified; President Obama’s 2009 stimulus was warranted. But stimulus is supposed to be temporary. It’s supposed to “jump-start the economy.” Expansion becomes self-sustaining. In Japan, this transition never really occurred. The longest period of growth (2002-07) depended heavily on a cheap yen that revived the export model. Richard Katz, editor of the Oriental Economist, calculates that about 60 percent of GDP growth in those years reflected exports and investment tied to exports. This ended with the 2008-09 financial crisis."

    If it was justified though why is he claiming that we're too dependent on stimulus programs? It seems to me that Japan-and here, there is a parallel with the current U.S. experience-actually shows the nullity of fears of a debt bomb and deficits. Indeed, what Japan shows-and now the U.S.-is that both deficits and a high proportion of debt to GDP, as Dick Cheney once put it, don't matter-at least during a recession or with considerable economic slack.

   P.S. Japan remains a complex case in that a more positive case for them is plausible. Yes they've had slower growth, but the per capita numbers show it's more the declining demographics-though the weakness of the domestic economy, as opposed to exports, that Samuleson mentions is a drag. Again, if only the Japanese cultural disdain for immigrants could be overcome, they'd go a long way to fixing their economy.

  Then too, they've maintained low unemployment. So when folks like Sumner sneer at the supposed futility of their fiscal stimulus, what they aren't thinking about is the unemployment rate. We could argue that their social priorities are in some ways more efficacious than ours.

  Of course, the case can also be made that high levels of social protection for workers tends to come in countries who are more  homogeneous. The very uncharitable attitude towards immigrants suggests that the numbers would be much less impressive with a more heterogeneous population. Looking at it that way, the U.S. may look a little better-we're still meager, but we do have a very diverse population and factoring it in would close the gap a little.

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