Weekend Economists Salute Our (Founding) Fathers June 14-16, 2013

[Demeter]

32. Japan Is a Model, Not a Cautionary Tale By JOSEPH E. STIGLITZ

http://opinionator.blogs.nytimes.com/2013/06/09/japan-is-a-model-not-a-cautionary-tale/

IN the five years since the financial crisis crippled the American economy, a favorite warning of those who have urged forceful government action, myself included, has been that the United States risked entering a long period of “Japanese-style malaise.” Japan’s two decades of anemic growth, which followed a crash in 1989, have been the quintessential cautionary tale about how not to respond to a financial crisis. Now, though, Japan is leading the way. The recently elected prime minister, Shinzo Abe, has embarked on a crash course of monetary easing, public works spending and promotion of entrepreneurship and foreign investment to reverse what he has called “a deep loss of confidence.” The new policies look to be a major boon for Japan. And what happens in Japan, which is the world’s third-largest economy and was once seen as America’s fiercest economic rival, will have a big impact in the United States and around the world. Of course, not everyone is convinced: though Japan reported a robust 3.5 percent annualized growth rate for the first quarter of this year, the stock market has dipped from a five-year high amid doubts about whether “Abenomics” will go far enough. But we shouldn’t read anything into short-term stock fluctuations. Abenomics is, without a doubt, a huge step in the right direction.

To really understand why things look good for Japan requires not only looking closely at Mr. Abe’s platform, but also re-examining the popular narrative of Japanese stagnation. The last two decades are hardly a one-sided story of failure. On the surface, it does look like there’s been sluggish growth. In the first decade of this century, Japan’s economy grew at a measly average annual rate of 0.78 percent from 2000 to 2011, compared with 1.8 percent for the United States. BUT Japan’s slow growth does not look so bad under close examination. Any serious student of economic performance needs to look not at overall growth, but at growth related to the size of the working age population. Japan’s working age population (ages 15 to 64) shrank 5.5 percent from 2001 to 2010, while the number of Americans of that age increased by 9.2 percent — so we should expect to see slower G.D.P. growth. But even before Abenomics, Japan’s real economic output, per member of the labor force, grew at a faster rate over the first decade of the century than that of the United States, Germany, Britain or Australia. Still, Japan’s growth is far lower than it was before its crisis, in 1989. From our own recent experience in America, we know the devastating effects of even a short (albeit much deeper) recession: in America, we’ve had soaring inequality (with the top 1 percent securing all of the gains of the “recovery,” and even more income), increased joblessness, and a middle that has been falling farther and farther behind. Japan’s example shows that full recovery doesn’t happen on its own. Luckily for Japan, its government took steps to ensure that the extremes in inequality that happened in the United States weren’t manifest there, and now is finally being proactive about its growth.

And if we broaden the range of metrics we consider, we see that even after two decades of “malaise,” Japan’s performance is far superior to that of the United States. Consider, for instance, the Gini coefficient, the standard measure of inequality. Zero represents perfect equality, and 1 stands for perfect inequality. While Japan’s Gini coefficient stands today at around 0.33, the number for the United States is 0.38, according to the Organization for Economic Cooperation and Development. (Other data sources put the United States’ level of inequality at even higher levels.) In the United States, the average income of the top 10 percent is 15.9 times that of the bottom 10 percent — compared with 10.7 times for Japan. The reasons for these differences are political choices, not economic inevitability. Also according to the O.E.C.D., the Gini coefficient before taxes and transfer payments is about the same in the two countries: 0.499 for the United States, and 0.488 for Japan. But the United States does only a little to modulate its inequality, bringing it down to .38. Japan does much more, reducing the Gini coefficient to 0.33.

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WITH his three-pronged approach — structural, monetary and fiscal policies — Mr. Abe, who took office last December, has done what America should have done long ago. Though the structural policies have not been fully fleshed out, they are likely to include measures aimed at increasing labor-force participation, especially among women, and hopefully by facilitating employment for the large number of healthy elderly. Some have suggested encouraging immigration as well. These are areas in which the United States has done well in the past, and are crucial for Japan to address, for the sake of both growth and inequality...AS the pieces of evidence fall into place, the pressing issue turns out to be not whether Abenomics is a good plan, but how the United States could achieve a similarly integrated plan, and what the consequences would be if it fails. The obstacle is not economic science but, as usual, America’s raging political battles. For example, despite austerity advocates’ dubious intellectual foundation, we have allowed public expenditures to slip in all sorts of areas, including those necessary for ensuring a future of shared prosperity. As a result, even as some states’ financial situations start to edge toward improvement, public employment is still some 500,000 lower than it was before the crisis; the decrease in jobs has occurred almost completely at the state and local level. To regain the pre-recession levels of employment and public services is a tremendous task, to say nothing of bringing them to where they would have been without a recession. (If the economy had been expanding normally, public employment would have increased significantly.) With inequality still high, the burdens are being felt, disproportionately, by our country’s most vulnerable....A major theme of my research has been that any country pays a high price for its inequality. Societies can have higher growth and more equality — the two are not mutually exclusive. Abenomics has already laid out some policies aimed to produce both. And one hopes that as further details are worked out, that there will be more policies that promote greater gender equality in the labor market will tap into one of that country’s underutilized resources. It will enhance growth, efficiency, and equality. Mr. Abe’s plan also reflects an understanding that monetary policy can only go so far. One needs to have coordinated monetary, fiscal and structural policies. Those who see Japan’s performance over the last decades as an unmitigated failure have too narrow a conception of economic success. Along many dimensions — greater income equality, longer life expectancy, lower unemployment, greater investments in children’s education and health, and even greater productivity relative to the size of the labor force — Japan has done better than the United States. It may have quite a lot to teach us. If Abenomics is even half as successful as its advocates hope, it will have still more to teach us.

ABENOMICS DIDN'T CREATE THOSE ECONOMIC DIMENSIONS...AND IT DOESN'T SEEK TO DISMANTLE THEM, LIKE THE SEQUESTER DOES...