The good news is that the Japanese economy — the stock market especially — is recovering. The bad news is that the austerity hawks and conservative pundits (often the same) still want to see Abenomics — the economic policies put forward by Prime Minister Shinzo Abe on taking office last year — as a mere flash in the pan. More sizzle than steak as one of the pundits put it earlier. Yet despite some hiccups that sizzle now looks like turning into a full-fledged conflagration. Abenomics seems to be winning out against bad economics.
Perhaps the biggest mistake of the bad economists was failure to realize how much the yen depreciation triggered by Abenomics can benefit an economy. They like to point out how any boost to exporters is canceled out by losses to import-dependent industries. But even in Economics 101 we learn that currency depreciation benefits not just exporters. A large swath of domestic industries also benefit — everything from pig farmers and parts makers competing with imports to universities and tourist hotels seeking foreign customers.
That said, the cheers from the optimists could be premature. To date the currency and share markets have been moving mainly on the basis of Abe’s call for monetary easing. But that is a fragile weapon. Any return to yen appreciation or increase in interest rates could send speculators running for cover.
Bank of Japan monetary easing urgently needs to be reinforced by Abe’s two other promised “arrows” — fiscal measures and new growth policies. To date, neither has offered much promise. The growth policies consist mainly of feeble offerings like anime exports, medical inventions, deregulations and Trans-Pacific Partnership trade liberalization. Austerity hawks are still able to kill any talk of serious fiscal stimulus.
The austerity people seem to see increased fiscal spending purely in terms of adding to national debt. But that really is bad economics. Well-chosen government spending can have multiplier effects that increase tax revenues as much as the spending increases.
By the same logic, spending cuts can very easily end up cutting tax revenues to the point where the national debt increases rather than falls. This is especially true for Japan where rises and falls in asset prices strongly influence tax revenue.
A map of the Japan economy for the past 30 years says it all. It shows a consistent rise in public spending matched by a consistent rise in tax revenues right through to the early 1990s. National debt increases, but at the same rate as GNP.
As we move into the mid-’90s, the austerity hawks take over. The spending cuts they urge push the economy into recessions. Tax revenues fall and stay depressed despite the later spending increases to counter those recessions. Increases in national debt are spectacular. During the Koizumi years when “structural reform” was supposed to save the economy, the national debt increased by a massive ¥200 trillion — an inconvenient truth ignored by our austerity hawks.
Reforms that increase demand and employment are what is needed. Deregulations that allow banks to lend more, employers to hire more, or new enterprises — even casinos — to be established can all have that effect. But many others favored by the austerity people — bankrupting weak companies, forced mark-to-market accounting or premature foreclosing on bad loans, for example — worsen the economies they were supposed to save. And many have a neutral effect, for example the plaintive Japanese calls for new research and inventions.
One especially weak argument says the sight of governments cutting spending will give the private sector the confidence to go out and invest. U.S. Keynesian economist Paul Krugman rightly calls it the “confidence fairy” approach.
Much of today’s bad economics is a hangover from the days when demand outstripped supply, and government spending checks were needed to rein in chronic inflationary tendencies. But in today’s advanced economies, Japan’s especially, we can easily have a reverse situation. Supply of goods and services is ample, too ample at times. Lack of demand allows deflation to replace inflation as the main problem.
Some austerity pundits compare Japan’s economy to a broken engine that the Keynesian planners try vainly to spark into action with the “gasoline” of fiscal stimulus. The real problem is the exact reverse. Japan already has a fine well-oiled economic machine. What it lacks is the gasoline of demand. It has been running on empty, for years, one reason being the demand-killing repairs those pundits have tried to make to that allegedly broken engine.
Some of the extra demand Japan’s economy needs so badly can come from moves that encourage more private spending. But the fiscal stimuli now vetoed by the austerity hawks will also be needed.
That said, the pessimists do have one valid point. If, thanks to Abenomics, the economy does begin to grow, then eventually interest rates are bound to rise. This rise will force a large increase in the government spending needed to service national debt. Unless that spending increase is matched by rapidly rising tax revenues, debt levels will rise even more, forcing even more debt service spending, ad infinitum.
There is an answer to this, now being put forward by the few serious economists who really do understand their dismal science. It says that provided inflation is under control governments can ignore their central banks and simply print the money they need to expand demand and service debt.
But don’t expect our austerity hawks to able to get their minds around this one. Bad economics is going to be with us for some time.
Gregory Clark has taught economics at Tokyo’s Sophia University and has served on several government economic committees in Japan. A Japanese translation of this article will appear on www.gregoryclark.net.