Let’s take a look at Krugman’s arrow theory, then politely smash it into the next galaxy.
Some disappointing numbers on Japanese GDP, and the usual suspects are out there denouncing Abenomics and calling for structural reform, the universal elixir. And the evidence that structural reform is the answer is …
What I believe to be the real lesson of Abenomics so far is the limits of monetary policy. There were supposed to be three arrows — monetary policy, fiscal expansion, and, yes, structural reform. But really only the monetary arrow was fired.
Overall, fiscal policy in Japan has actually gotten tighter, not looser, since Abenomics began, mainly thanks to the consumption tax hike; other measures didn’t offset this much.
So all the weight rested on unconventional monetary policy, which did succeed in depressing the yen and pushing up stocks, but hasn’t been enough to generate a convincing boom or rise in inflation.
And that appears to not be enough, just as the ECB’s actions haven’t been enough without fiscal support. Never mind the third arrow: what we need is the second.
Decades of Stimulus Failed
This week the government of Prime Minister Shinzo Abe proposed a new fiscal stimulus package. It is moderately sized: about $45 billion in U.S. dollars this year, and about $60 billion in low-interest loans, to be followed by slightly less next year.
That move might win a few halfhearted cheers from Japan’s battered consumers, but it’s unlikely to have much of an effect. First, it’s just another in a long series of such moves, none of which have done much to jog the country out of its long, grinding stagnation. Bloomberg News’s Maiko Takahashi and Isabel Reynolds have a great chart showing a quarter century of Japanese stimulus bills, including a breakdown of their announced sizes and their actual spending amounts: Businesses and consumers have come to expect this regular flow of government spending — having experienced it nonstop for over two decades, they’ve already accounted for it in their investment and consumption plans.
But there’s another, even bigger reason why this stimulus isn’t going to do much to juice Japan’s economy. The economy is already at full employment.
Demand-side measures, by their very nature, rely on putting unused resources to work. Idle factories and unemployed workers are matched, thanks to the flow of government spending that works its way through the economy.
Japan’s employment rate now stands at a historic high. Almost 73 percent of the population aged 15-64 have jobs. In the 1980s, the rate was under 68 percent. There are simply very few Japanese people left to put to work.
Fiscal stimulus is not supposed to work very well under those conditions. Studies of fiscal multipliers — a measure of the effect of government spending on gross domestic product — typically agree that return is much lower when unemployment is low. So we should expect this new bout of spending to get very little bang for the buck.
In the meantime, the new spending will actually undermine one of Abe’s most overlooked accomplishments — fiscal sustainability.
So what should Japan do instead of continual fiscal stimulus? At this point, there’s really no option except to focus on worker efficiency. Japan’s labor productivity has been essentially flat for a decade. Monetary and fiscal stimulus have put everyone in Japan into jobs, but they aren’t doing the kind of work that takes full advantage of their skills. Productivity-focused reforms — improving corporate governance, liberalizing labor markets and opening up protected domestic markets — are the best move, even though they will take years to have an effect.
Lesson for Krugman
The Hamada Marine Bridge soars majestically over this small fishing harbor, so much larger than the squid boats anchored below that it seems out of place.
And it is not just the bridge. Two decades of generous public works spending have showered this city of 61,000 mostly graying residents with a highway, a two-lane bypass, a university, a prison, a children’s art museum, the Sun Village Hamada sports center, a bright red welcome center, a ski resort and an aquarium featuring three ring-blowing Beluga whales.
Nor is this remote port in western Japan unusual. Japan’s rural areas have been paved over and filled in with roads, dams and other big infrastructure projects, the legacy of trillions of dollars spent to lift the economy from a severe downturn caused by the bursting of a real estate bubble in the late 1980s. During those nearly two decades, Japan accumulated the largest public debt in the developed world — totaling 180 percent of its $5.5 trillion economy — while failing to generate a convincing recovery.
One lesson Mr. Geithner has said he took away from that experience is that spending must come in quick, massive doses, and be continued until recovery takes firm root. [Quite frankly that is idiotic because logic dictates that as soon as the stimulus stops the recovery will die as well.]
“It is not enough just to hire workers to dig holes and then fill them in again,” said Toshihiro Ihori, an economics professor at the University of Tokyo. “One lesson from Japan is that public works get the best results when they create something useful for the future.”
[Yes indeed – Do something useful. But who can determine usefulness other than the free market?]
In total, Japan spent $6.3 trillion on construction-related public investment between 1991 and September of last year, according to the Cabinet Office. The spending peaked in 1995 and remained high until the early 2000s, when it was cut amid growing concerns about ballooning budget deficits.
[Deficits be damned. Spend more says Krugman].
Economists tend to divide into two camps on the question of Japan’s infrastructure spending: those, many of them Americans like Mr. Geithner, who think it did not go far enough; and those, many of them Japanese, who think it was a colossal waste.
Beyond that, proponents of Keynesian-style stimulus spending in the United States say that Japan’s approach failed to accomplish more not because of waste but because it was never tried wholeheartedly.
Bubble Blowing Beluga Whales
With full employment, roads paved and repaved to nowhere, and bubble blowing beluga whales, just what the hell is Japan supposed to waste money on?
Curiously, Krugman says it doesn’t matter. He once proposed a fake aliens from outer space scare as the solution to stimulate the economy.
But roads and bridges and bubble blowing blowing beluga whales are surely better than fabricating space aliens or paying people to dig ditches and others to fill them up again.
The problem is, it’s hard arguing with economic illiterates like Krugman. He can (and will) say “spending wasn’t enough”.
One can never prove him wrong. The implosion of Japan would not do it. His built-in excuse would be Japan did too little, too late.
Economists in Need of Remedial Education
Just once I would like Krugman to address in his model what happens when the stimulus stops. He cannot and he won’t because he has no answer.
The average 5th grader understands it’s absurd to pay money for something guaranteed to be useless, but the average Keynesian economist doesn’t.
Krugman would do himself a favor if he threw away what he thinks he knows about economics and went back for a nice 5th grade education.
Mike “Mish” Shedlock