Fail Economics & You

From a 2001 article in the telegraph:

"The government's piling up all this debt, and that will be a real problem for our children," said his wife, Akemi, 37. "We have to save money, not just for ourselves, but for them."

"When everything was going right in the 1980s we didn't have to think about anything," said Mr Tamura. "Now I follow what the government is doing. I hate it that they're spending all this money on public works projects that we don't need."

The Japanese government's huge deficits encouraged people not to spend as they realised that unsustainable spending today will mean higher taxes tomorrow for either themselves or their children. Thus not only does stimulus spending get wasted pouring concrete into holes, it also encourages the very behaviour its architects are trying to avoid. 

In the vast majority of cases stimulus spending is pure economic destruction. It discourages economic activity for fear of future tax expenses, crowds out the private sector debt markets and wastes resources in the construction of economically dubious infastructure that would never have been constructed under reasonable budget constraints given the poor cost/utility ratio.

Stimulus spending is embarrassingly stupid.

article: http://www.economist.com/books/displaystory.cfm?story_id=13176890

Gets owned badly by the first comment:

"You write: "Too ready, perhaps: what if the price of greater equality is lower growth?"

I can hear your voice ringing down the ages: What if the price of environmental protection is lower growth? What if the price of civil rights for blacks is lower growth? What if the price of women's suffrage is lower growth? What if the price of the abolition of slavery is lower growth? What if the price of overthrowing a dictatorial monarchy is lower growth? What if the price of religious freedom is lower growth? If we had listened to your voice over the centuries, we would still be serfs in medieval kingdoms, lorded over by a rich overclass that enjoys the benefits of "growth".

Your mantra is growth without regard for who benefits from it. Appropriate, I suppose, for a magazine with economics as its focus. Fortunately for us, most of the world believes that there are values that are more important than economic ones, prime among which is the creation of a society that is just and which, for that reason alone, will not perish from this earth."

I've come to dislike The Economist alot. It forever bashes Japan despite Japanese socio-economic development being at a much higher level than the rest of the world. Here are two other comments on another article that really rang true for me:

article: http://www.economist.com/displayStory.cfm?story_id=13061521

"I wouldn't trust anything The Economist writes about Japan as its editorial staff seem to have had a visceral dislike of the place for years which taints its views.

Diversification in itself is not proof of bad management. If importing Italian tomatoes is profitable, then that's good, and diversification of business lines can spread risk. This is trite economics.

Japanese companies are not perfect, but they are hardly as badly managed as The Economist seems to think. If The Economist's ideal is the Anglo-Saxon maximising shareholders' returns to the detriment of all other stakeholders, then we already have the answer to what the result is: GM, Chrysler, RBS, , the ghastly South-West Trains, Lloyds Bank etc. that awful company BA...

Japanese management may not be perfect, but at least they don't pay themsleves obscene sums of money for poor performance. Give me bumbling Sony any day!"

"To economists who measure everything by return on capital, the japanese model is deemed "inefficient". That is because the japanese put social stability, cohesion, preservation of culture, etc higher up their scale of priorities. They don't subordinate everything to the pursuit of money.Sure, Japan is not perfect and can benefit from some fundamental reform. But the resilience of japanese society despite the bursting of their credit bubble in the early 90s gives food for thought. Measured over the half-century since the end of WWII, they have produced a more equitable society than the rest of the G7, not to mention world-beating industrial companies that are still eating America's breakfast during their "lost decade", while America bankers were preoccupied with "creating value" from flogging their IOUs to China and teaching the heathen how to do business before the roof caved in on their elaborate Ponzi schemes.There are more ways to live than "growth = accumulation of material wealth"."

While I used to think quite highly of it, more and more I think The Economist has completely missed the "meaning" of everything. As in, they do not seem to be willing to see that Japan's economic system has built a far superior society than the USA or the UK, which can be plainly seen in less crime, less social problems, low income inequality, a vibrant culture that has actually thrives despite being constantly merged with new technology, no socially oppressive religion and a people famed for their politeness and so universally principled that all manner of objects can be laid unsecured and in public and will not be abused or stolen by a random person as would happen in the USA or the UK.  The cost of this is indeed paid for by less return to shareholders and less opportunities for individualists to become hugely rich. But even with that trade Japan maintains a similar per capita income of other fully developed countries (including some Scandinavian countries which also make fantastic counterexamples to the anglo-saxon way, though these countries are also quite different to Japan).

I see no hard logical rigour in The Economist's writings, only an endless cawing of ideological positions that are embarrassing failures in reality.

A brilliant veil-lifting article on the real GDP growth per capita of various countries over the past few years, written about half a year ago:

http://www.economist.com/finance/displaystory.cfm?story_id=10852462

While I am not a fan of the GDP measure, I did love the reality-basedness (is that a word?) of this article. By discounting population growth, a true measure of the actual increase in wealth creation can be more clearly seen. With real Japanese growth per capita snapping at the heels of the UK and above the USA, one is left pondering and in doubt about the quality of the large amounts of economic analysis intent on "fixing" Japan's economic issues. Particularly the obsession of many scholars with the "problem" of mild deflation deserves some further critical analysis.

Furthermore, as some of the economic growth in the UK and USA over the period in question are the result of an unsustainable residential real estate ponzi scheme which is now collapsing, Japan's economic performance may be seen in an even brighter light. However an offsetting factor may be the huge increase in Japanese government debt which may play a similar restrictive role in Japan's future economic development as the collapse of the real estate markets will for the UK and the USA. 

The resistance of the Bank of Japan to taking more extreme measures to end Japan's low inflation/deflation (the rate has varied significantly above and below zero over the past few years) has received strong criticism from both the government of Japan and from a wide variety of international economists. Policy suggestions such as a much larger level of government debt monetization by the bank or the adoption of an official inflation target have met with consistent rebuke from the BoJ. The BoJ argues, among other points, that such policies could result in large excessive inflationary pressures that may be difficult to control and run the significant danger of trigging asset price bubbles, as has occurred in the past, or that greatly increasing it's level of monetization of the government debt itself creates a moral hazard as it discourages fiscal discipline on the part of the government and it is likely that the government would just waste any money received in this manner. 

It would seem that the BoJ's policies have been vindicated by the performance of the Japanese economy and its restructuring to an environment of price stability. While the lack of inflation in Japan is slated as a cause of low domestic demand and a reduced incentive to invest, this is committing the same fallacy mentioned in a previous post of mine, of assuming that arbitrary consumption for the sake of consumption (and investment for the sake of investment) is a good thing, regardless of the fundamentals involved. It is the very lack of inflation in Japan that has discouraged "panic-buying" of assets and helped it to avoid malinvestment and over-leverage that has lead to bubbles in the UK and USA. Japanese corporate debt has fallen dramatically since the onset of deflation, with consumer debt also falling at a moderate rate and in stark contrast to the rise in consumer debt seen in the UK and USA. Further elaboration can be found in another brilliant article:

http://www.economist.com/finance/displaystory.cfm?story_id=12059274

Under price stability, Japanese market participants are free to make more rational consumption and investment decisions, as there is no longer a time correlated penalty to non-consumption and non-investment of cash holdings. A lack of inflation also reduces the incentive to increase leverage through debt issuance, as the real value of the principle will not be eroded over time. 

I am personally very interested in the unsung benefits of a zero inflation environment and think it would be a fascinating research topic. It is apparent that it may provide significant robustness in resisting asset price bubbles and discouraging over-leverage. 

The BoJ's policies may well be a glimpse of the future path of other central banks. Big Ben himself mentioned a month or so back that central banks may have to change their policies to try to actively target asset bubbles before they inflate too far with tighter policy, instead of letting them grow and explode on their own and then cleaning up afterwards with extremely aggressive preemptively loose policy. In saying that, given the overwhelming criticism in academic papers of the Bank of Japan's recent policies, including criticism from Big Ben himself, I find it difficult to imagine such a large ideological shift will be possible any time soon. Perhaps the current crisis may give an impetus to viewing the BoJ's policies in a kinder light. 

A quick answer: yes.

"Japan has become the world’s strongest piece of evidence that the Keynesian policy of economic growth through deficit spending does not work well."

While Japan's economic problems have been greatly exaggerated, this is still the elephant in the corner. Stimulus packages don't work. They have never worked. The packages being announced across the world recently are purely a wealth redistribution exercise, allowing people alive today to enjoy higher consumption at the arbitrary expense of people born in the future. This is stupid and immoral.

http://www.bloomberg.com/apps/news?pid=20601039&sid=a8kMMkZtE6xw&refer=home

I would've expected better from Gordon Brown. Is there not anyone left in the world who will stand up and say "The money just isn't fucking there. Pay more taxes, have less services and shut up" to the masses? Instead they would enslave future generations to debt that has nothing to do with them. How dishonourable. How unmasculine and irresponsible!