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.