Japan and the Limits of Keynesianism

Discussion in 'Economy' started by Trajan, Dec 28, 2010.

  1. Trajan
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    Trajan conscientia mille testes

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    the lost decade appears to be teed up for a third act.....

    Scary.




    Japan and the Limits of Keynesianism


    Japan's budget is in a truly terrifying state. Reading about the government's behavior reminds me of the worst accounts of compulsive spenders on the verge of personal bankruptcy--a sort of "What the hell, we're screwed anyway, so let's not think about it and maybe go to Cabo for the weekend." The budget's structural position is what is known technically to economists as "completely hosed"; borrowing now exceeds tax revenue, and debt service costs now eat up almost half of the tax revenue the government collects. "Unsustainable" is too weak to describe the situation; I don't know how they're doing it now.

    To be sure, a lot of people have been awaiting the inevitable collapse of the Japanese government's finances for the better part of a decade. I know all the arguments for why this isn't such a big problem: their debt is financed domestically, much of it through the postal savings system that pays little for its borrowing, and the Japanese are extremely patriotic about their nation's financial needs. That may shift the locus of the problem, but it doesn't actually solve it; eventually, no matter how patriotic they are, the Japanese are going to want to use some of those savings to support themselves in their old age. Some sort of crisis virtually has to ensue.

    When I was starting out as a journalist, I frequently had Japan used to illustrate Adam Smith's precept that "there's a lot of ruin in a nation"; any time someone was tempted to get hysterical about government borrowing in America or elsewhere, someone else would inevitably point out that Japan's debt burden was well over 100% of GDP, and the country still hadn't collapsed. But while there is a lot of ruin in a nation, there isn't actually an endless supply, and Japan may well be finally approaching the limits.

    Felix Salmon views this as a symptom of a broader political failure:

    The situation in Japan is particularly depressing because the country has no major ethnic or political rifts. Sure, there's political jostling, both within and between the parties. But it's nothing compared to the vitriol and mistrust that we see in the US, and somehow I can't imagine Greece-style riots in Japan either. But still the technocrats can't make any headway.

    The lesson here, I think, is that it's very, very hard for a government to enact a serious fiscal adjustment unless and until the bond market forces its hand. The Brits are trying, of course -- and we'll see whether or not the coalition government can succeed. But as we saw with George W Bush, the fiscal rectitude of one administration can be more than wiped out during the course of the next.

    Even now, with the attention of the world more concentrated on sovereign fiscal issues than ever, the Japanese government can still contrive to raise agricultural subsidies by 40% and send child-care payments soaring, including payments to families who don't need the money. It's even getting rid of highway tolls. Oh, and it's cutting the corporate tax rate.

    From a bond-market perspective, this basically just means an ever-greater supply of JGBs: we're still a very long way from any real credit risk, given the political power of the owners of those bonds. But as a lesson in fiscal political economy, Japan is much more worrisome.


    I see it a little bit differently: Japan has simply reached the limits of Keynesian policy in an economy which has never managed to jolt itself back up to a healthy rate of growth. Demographics is obviously a big contributor to that slow growth, and there are a whole host of secondary factors one could nominate, but whatever the reason, they have now had two decades of anemic growth, which they have fitfully attempted to address with stimulus. Maybe not enough stimulus, maybe badly designed, but they've certainly tried to follow the basic Keynesian playbook: borrow money and spend it when times are bad, in the hopes that you can bring back growth.


    more at-
    Japan and the Limits of Keynesianism - Megan McArdle - Business - The Atlantic
     
  2. Baruch Menachem
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    Baruch Menachem '

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    They have been trying to go the Keynsian route for 30 years.

    It really won't work. They are like someone who bought a fail proof system for breaking Vegas, and they refuse to give up when it has gone through everything they have.
     
  3. Sallow
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    Sallow The Big Bad Wolf. Supporting Member

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    One Japan's "major" problem is population. They are not replacing the people going into retirement.
     
  4. william the wie
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    william the wie Gold Member

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    Sallow is correct about the population problem but that is true about most of Austral-Eurasia with very few exceptions as Muslim nations are also slowly getting into birth control and the Koran forbidden gender specific abortion business.
     
  5. loosecannon
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    loosecannon Senior Member

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    probably the scariest part of it is that the world continues to support the yen and thus support the massive carry trade they financed.

    The relationship between deflationary traps at the national level and money supply at the global level creates irrational outcomes that are astonishingly durable.

    Which oddly enough is exactly what our Fed Reserve is banking on. We have a long term econ strategy based on our being able to copy Japan's suspended animation economy.
     
  6. william the wie
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    william the wie Gold Member

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    Except there are limits to how many people can play this game for how long. There are currently five players: China, EU, Japan, US and UK; whereas three years ago Japan was the sole player. With the US in the game the music will stop a lot faster. Once the first one drops the rest will follow within three months. As they put it on Minyanville risk can be transferred but not destroyed.
     
  7. loosecannon
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    loosecannon Senior Member

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    That may be true, but I will wait and see. The Fed is clearly expecting that the US can keep afloat at least as long as we retain commodity exchange currency status, or best refuge status.

    I admit it is irrational that Japan hasn't been busted yet, but they haven't. With all currencies headed down similar paths I truly wonder if the day of reckoning I expect and you expect won't disappoint us.

    It is all a fantasy after all. In the land of make believe anything can happen.
     
  8. william the wie
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    william the wie Gold Member

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    I don't expect that day soon for example I expect the decline in employment in states mentioned in the minimum wage thread to be attributed to the severe winter. Likewise I expect the Japanese-Brazilians and Koreans to be blamed for derailing Japan.

    You may be underestimating the power of Rationalization as in Bernancke got reappointed and Geithner promoted for their mishandling of the meltdown. Japan and BOJ will come up with some CYA BS when their bubble pops.
     
  9. Toro
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    Toro Diamond Member

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    There is a Japanese economist out there who very persuasively argues that Japan would have been far worse off without Keynesianism. I posted it here a few years ago but can't remember where.

    Don't know if he's right or not.
     
  10. loosecannon
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    loosecannon Senior Member

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    In what way did he say they would have been worse off?
     

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