Japan\’s lost decade

It really is amazing what people won\’t see in Japan\’s stagnation of the last 10-20 years.

Throughout the past 20 years, the government has gone in for fiscal stimulus – as evidenced by its annual big-budget deficits – so that the infrastructure has been constantly renewed. In Britain, the coalition plans to slash spending on such big new projects – and there\’s no sign that the private sector will pick up the tab………Two other aspects suggest Britain will have a much worse lost decade than Japan. First, Japanese companies hold on to their staff: the jobless rate over the past 20 years has never risen above 6%. Compare that with the British tradition of hire-and-fire, and an unemployment rate already marching up to 9%. Second, Japanese respect for equality means that even CEOs of big firms in the Nikkei take home an average wage of only 16 times the average worker. In Britain, a FTSE boss is paid closer to 88 times what his or her employees earn.

So, let us turn all empirical on the economy. Forget all theory. Yes, even the theories you like.

Yes, really, even Keynes.

So we\’ve an economy that\’s been flatlining for near two decades. It\’s got a relatively egalitarian income distribution, companies labour hoard and they\’ve had buckets and buckets of fiscal stimulus through infrastructure spending.

And that\’s the economy that has been flatlining.

So, would we, just on these facts and these facts alone, start recommending a relatively egalitarian income distribution, labour hoarding and fiscal stimulus through infrastructure spending as a way of avoiding a couple of decades of stagnation?

Well, you know, I think we probably wouldn\’t. I think our observation of the real world out there would probably lead us to argue that these policies are contra-indicated in fact.

But with these facts before us, how to explain them? We do need to construct a theory which can explain them, even if only because we humans are pattern seeking creatures.

There are bits and bobs out there to help us as well. We\’ve Ken Rogoff\’s work showing that once govt debt to GDP gets over a certain rough amount then it acts as a break on growth in GDP. 90% I think is the number most often mentioned, 120% being the level at which it\’s sufficient to bring growth pretty much to a stop (vide both Japan and Italy).

Which rather means that there\’s a limit to how much of that fiscal stimulus stuff you can do through infrastructure spending for example.

There are others out there, the Austrians for example, with useful theories which explain the observations.

My own thought is (and I must emphasise that there\’s nothing original about this, it\’s just the explanation that makes sense to me, perhaps the one that best accords with my own prejudices) that you can get short term results by playing around with the macroeconomic variables, but not long term results.

Hmm, no, that\’s a bit harsh: perhaps a better formulation is that the long term isn\’t in fact just a series of short terms.

Or as I\’ve put it before, in the long run it\’s all microeconomics. Growth, over the long term (and yes, 20 years is long term, it\’s half a working life, that\’s long term for human beings) is all about incentives, red tape, tax levels, innovation, entrepreneurship, all the things that are discussed in the micro part of economics courses.

I\’m even willing to agree that the macro parts are important as a background but only in a gross sense. No hyperinflation, no deflation, 30% unemployment doesn\’t help anyone etc. But as long as nothing grossly wrong is done at that level then how the economy performs over the decades is about the micro structure of it, who is opening new firms, to do what, what are their incentives, how, not how is new technology invented, but how is it deployed.

I don\’t say I\’m right here, only that it makes sense to me, this distinction.

But if I am right then what we need to do now is rather clear: sure, OK, go ahead and wibble about the macro part of the economy. But in order to avoid 20 years of flatlining we\’ve got to sort out the micro side of it all.

In short, we need the supply side revolution that Japan didn\’t have.

 

9 comments on “Japan\’s lost decade

  1. And big dollops of government spending may actually get in the way of micro reforms.

    The big success of the Teutonic Export Machine is undoubtedly all in the Micro.

  2. The leading keynsian Krugman from my memory told the LSE that the way out of a financial crisis was to export but in a global financial crisis we needed another planet to export too.

    There is a missing part to the Japanese and our problem which is the deleveraging of debt McKinsey research (growth under pressure)
    states this;
    “The sharp rise in government borrowing means that the difficult “belt tightening” process that MGI’s analysis of history suggests we can expect—in which the ratio of total public and private debt to GDP could eventually fall by as much as 25 percent—has not yet even begun.”

    Oh and a bit naughty not to credit Ms C Reinhart.

  3. The Economist recently had something about how Japan’s lost time hasn’t been so lost. If you look at change in GDP per capita they’ve done as well as the rest of the rich world, it’s just that their demographics make total GDP look much worse than that of the EU and particularly the US.

  4. You mean people are comparing GDP rather than GDP per capita? Not very bright. But wouldn’t you ideally like subtract from the capita total anyone under, say, 18 and, perhaps, over 70 or 75? Japan might then look pretty damn good. So might Germany or Italy? Spain?

  5. Following on from Thibault

    The interesting thing about Japan is that living standards in Japan are pretty much the same as they were 20 years ago. While that doesn’t sound all that great, the simple fact is that Japan has very high living standards 20 years ago and still have very high living standards. They have high living standards, high levels of savings, excellent infrastructure, high technology industries, excellent manufacturing.

    The reality is that they are a mature advanced economy that is unlikely to see GDP growth much above 2% in the future.

    From the perspective of the people of Japan the last 20 years may not have been all that “lost”. of course investors haven’t made the returns in Japan that they had in the past but if the economy is about making people have decent lives the Japan is certainly a success.

    They have some long term problems, such as an aging population and no real way of paying down thier massive levels of debt in the long term, but hey the debt is in Yen so hey it can be inflated away if necessary.

    Of course as you rightly point out Japan is culturally very different from the UK or US and is pretty much a monoculture. which explains why they have reacted differently that perhaps we will over the next few years.

  6. I’ll post here a bit from a comment I made on this a while ago…

    The first thing to understand about the “lost decade” is that many discussions of it avoid demographics, and demographics is always crucial.

    Economists generally see long-run growth this way, there are three interconnected drivers of increased living standards:
    * Improvements in Technology.
    * Division of Labour.
    * Increased capital intensity.

    These all refer to the supply side, they refer only to production activities. If these drivers are functioning we expect productivity to grow with time. That is we expect the hourly productivity of work to grow with time. All of what I’ve said here has it’s problems, but they’re not enormous. This means we have to ask: what happens if the working-age population falls and the number of hours of work that population prefers to work falls? A large proportion of the problem in Japan comes from this direction. The population is falling and particularly the working age population is falling. The ethos of working very long hours that prevailed before the 90s is decreasing.

    All this means if you ask questions about fundamental productivity then you get very different answers to those about real GDP growth. See:
    http://www.project-syndicate.org/commentary/gros18/English
    So, I don’t think Japan’s actual performance vs it’s possible performance has been as bad as some imply.

    (Everyone should be wary of being parochicial. In the west economic growth has happened in the slowest and most long-run manner possible. England for example has been steadily growing since the 1770s. In that situation changes in the cultural attitude to work, changes in the pensioner population and in birth rates are long-run “secular trends” for economics. In other countries the situation is much different, changes have happened much more quickly. Economists have to be wary of the idea that all the world is like England (or the idea that all the world is like India – Malthus’ view)).

    I think economists that say that monetary problems can cause a recession that’s lasted more than a decade can’t be right. It’s quite true that prices take time to change, we have price stickiness. It’s also quite true that contracts (especially debt contracts) make that worse by enforcing agreements made under earlier conditions of expectations (so called “debt stickiness” or “contract stickiness”). But realistically these things could only have been an issue for a few years at the start until the trend of falling prices was established.

    I think what’s happened is at the beginning ~91-95 there were problems with monetary policy, and hangover from misallocation in the earlier bubble. Since then though I think lots of the slowdown has come from the real side, from demographic changes.

  7. Japan has very high living standards 20 years ago and still have very high living standards.

    In some ways, yes. But they work like horses and live in shoe-boxes.

    And just for some trivia, their scaffolding is crap compared to ours. 🙂

  8. How can living standards be the same in Japan as 20 years ago? I mean, really, they can’t. This is why I bang on about GDP being a useless measure of nothing much. Because it suggests a 16kB Atari console attached to a cathode ray telly is worth the same as a Playstation linked up to a 1080p beamer with 2-metre projection screen, simply because the former setup 20 years ago has the same “value” in real inflation-adjusted money as the current setup today. It’s just bollocks.

    It’s bollocks based on the contention that when consumer goods and services drop in price they are worth less. The opposite is actually true.

    Tim adds: Your complaints come under “hedonic adjustments”. It might not be done very well but it certainly is done, adjsuting for those sorts of quality changes.

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