Mistaken economic policies

by Gregory Clark

Another year, another budget. And yet another increase in public debt as tax revenues yet again fail to provide the funds needed even for the budget’s highly restricted outlays.

And yet another prediction of miserable 1 to 2 percent growth rates, together with the usual poor excuses — U.S. subprime loan problems, rising oil prices, aging population, currency appreciation.

Somehow one of the world’s strongest economies enjoying the world’s lowest interest rates is supposed to be vulnerable to these pinpricks. Meanwhile, China just shrugs them off with its breakneck progress.

I have another idea. Why not simply admit there is something fundamentally wrong with Tokyo’s economic policies?

Much is made of the accumulated official debt problem — now over ¥800 trillion and still rising. This is supposed to justify the restrictive fiscal policies that cause so much damage. But in a nation of chronic savers, inveterate tax avoiders, ¥560 trillion in government financial assets and over ¥700 trillion in personal cash and deposit assets, this debt is inevitable.

What’s more it cannot be solved by unending budget stringency. All this does is slow economic growth, reduce tax revenues and cause more deficit financing, which increases the official debt, which causes more budget stringency, etc. In the year of the mouse, rats on a treadmill look sane by comparison.

Rats at least look for escape routes. Japan has long had at least three possible escape routes from its economic treadmill, all ignored.

Put forward by Seiji Ono, who heads the Association for Japanese Economic Recovery (AJER), this one says the government should be trying to spend more rather than less. In Japan’s currently depressed economy, the multiplier effects from increased budget spending would increase tax revenues enough to reduce the official debt burden. The treadmill would slow down and eventually stop.

Also promoted by AJER, this says that Japan can solve its debt problem overnight simply by having the Bank of Japan purchase government debt directly, since interest payments on the increased debt would be going to its own entity.

Promoted by Kansai economist, Haruki Niwa, this route says that even if the BOJ refuses to cooperate, the government can create and spend its own money. There is a precedent, namely the move by former U.S. President John Kennedy in 1963 to have the U.S. government bypass the Fed with its own issue of $4.6 billion.

Each of these options makes serious economic sense in Japan’s chronic noninflationary situation. What’s more, the AJER proposals can claim the support of three top U.S. economists:

(1) Economics Nobel Prize winner, Lawrence Klein: “My proposal would be money expansion — Bank of Japan purchases of government debt.”

(2) U.S. Federal Reserve chairman Ben Bernanke speaking in 2003: “Government concerns about its outstanding stock of debt (can be) mitigated if increases in its debt are purchased by the BOJ rather than sold to the private sector,” and “with protracted deflation, excessive money creation is unlikely to be the problem.”

(3) Paul Samuelson: “What counts is to rid the system of insufficient real spending.”

Ono points to difficulty in changing Japanese opinion once it has been set in one direction. He has a point. The conservative peasant mentality that views debt as an evil that must be worked off, even if the children have to go without shoes, is one factor.

Mind control is another. The barrage of “structural reform” propaganda demanding fiscal restraint to cut government debt has been relentless. It reached a crescendo under former Prime Minister Junichiro Koizumi and his heavily U.S.-influenced academic adviser Heizo Takenaka. Throughout it was strongly supported by Japan’s main financial media, the Nihon Keizai media stable in particular. The conservative British and U.S. financial media have also chimed in powerfully. The fact that the national debt has increased relentlessly as a result — by a whopping ¥200 trillion the Koizumi era alone — does little to cool the zeal.

Ideology too is a factor — a desire to drive out allegedly leftwing Keynesian demand-side thinking in the universities and elsewhere and replace it with rightwing U.S.-British supply-side policies from the Reagan-Thatcher eras in the United States and Britain. So a nation that suffers from a surplus of supply and inadequate demand has to move to policies designed for a surplus of demand and inadequate supply? How silly can you get.

Fortunately some of the politicians, influenced by recent election results, AJER activism, or simply common sense, are beginning to realize the need for fiscal policies that revive the economy and increase tax revenues. But they have to contend with yet another treadmill proposal — an increase in the consumption tax, which will cut consumption, worsen the economy, lower tax revenues.

And why is the much simpler BOJ direct purchase of government debt proposal ignored? Incestuous dealings between the main city banks and the BOJ to preserve their monopolies, and their profits, from the creation of money and credit perhaps?

Richard Werner, with his 2003 book “The Princes of Yen,” also suggests that the BOJ and some other people in top places have wanted deliberately to slow down Japan’s economic growth — to purge the economy of its sins through forced bankruptcies and an increase in the foreign business presence. Economic Armageddon.

Meanwhile, China relying on simple Keynesian economics forges ahead. It had the same bad loan problem as Japan and solved it easily through central government taking over the loans and writing them off (something that Werner and quite a few others proposed for Japan but was also largely ignored). It spends money when the economy is down, and cuts back when the economy is up.

There is a message here for Japan’s anti-Keynesians and befuddled fiscal conservatives, but they are too busy on the treadmill to listen to it.

Gregory Clark is vice president of Akita International University. A Japanese translation of this article will appear on www.gregoryclark.net.