If I had a dollar for every scare story about Japan’s ‘lost decade’ (or decades), I would already own a Greek island and be done writing these blogs. The latest example of this genre comes from yesterday’s Financial Times, courtesy of Stephen Mallaby:
Almost exactly 20 years ago I packed my stuff in London and moved to Japan. The Tokyo stock market had crashed some two years previously; the property market was in free fall; lenders that had relied on buildings as collateral were gasping for air. Yet the country was in denial about its problems. Nobody imagined that Japan would today be suffering its fifth recession in two decades.
The question is whether Europe is walking the same path.
Yes, by conventional metrics, it looks as if Japan has experienced nothing but economic misery over the last 2 decades. But can really compare the loss of human capital and social implosion now characteristic of the Eurozone to Japan? It has been taken for granted that Japan collapsed in the early 1990s after a spectacular property boom burst and has not really recovered since. The conservatives also claim that Japan shows that fiscal policy is ineffective because given its on-going budget deficits and record public debt to GDP ratios the place is still in shambles.
Not so fast: while Japan has problems it demonstrates that a fiat monetary system is stable and we should be careful comparing the Eurozone to the experiences that unfolded in Japan in the 1990s and beyond. Consider this Huffington Post article as a counterpoint to the Mallaby argument (and, to be fair to Mallaby, he is not the first to invoke the Japan scare story):
Steven Hill which addressed some of the “myths” about Japan that motivate economic policy debate in the advanced nations (such as the US). He write:
Reading the series is about as cheery a task as rubbernecking at a car wreck on I-95. But unfortunately the Times series simply repeats the “conventional wisdom” about Japan put out by the same economic experts who missed an $8 trillion housing bubble in the United States, and in fact have been wrong on most of the big economic issues over the past two decades.
Look at it this way: In the midst of the Great Recession, the United States is suffering through nearly 10% unemployment and 50 million people without health insurance. A new report has found over 14% of Americans living below the poverty line, including 20% of children and 23% of seniors, the highest since President Lyndon Johnson’s War on Poverty. That’s in addition to declining prospects for the middle class, and a general increase in economic insecurity.
How, then, should we regard a country that has 5% unemployment, healthcare for all its people, the lowest income inequality and is one of the world’s leading exporters? This country also scores high on life expectancy, low on infant mortality, is at the top in literacy, and is low on crime, incarceration, homicides, mental illness and drug abuse. It also has a low rate of carbon emissions, doing its part to reduce global warming. In all these categories, this particular country beats both the U.S. and China by a country mile.
Doesn’t that sound like a country from which Americans might learn a thing or two about how to get out of the mud hole in which we are stuck?
Hill documents why the “you don’t want to end up like Japan” syndrome is appealing to conservatives but missed the point entirely.
According to Hill, during the lost decade, Japan maintained:
- An unemployment rate was about three percent and about half the US unemployment rate over the same period.
- Universal healthcare.
- Less income inequality than the US.
- The highest life expectancy among the advanced nations.
- Very low rates of infant mortality, crime and incarceration.
The obvious conclusion is that “Americans should be so lucky as to experience a Japanese-style lost decade”. I’m sure there’s a number of Greeks or Spaniards who would happen to agree with this assessment.
As Hill notes, we tend to use very narrow metrics to determine a nation’s economic success: “Americans are the only ones who seem to think they need three refrigerators, four televisions and a car for everyone in the household” is the best way to measure national well-being. I admit that terms like “happiness” and “well being” can be somewhat amorphous, although it is only in the last 40 years or so that we have defined prosperity solely in terms of the metric of growth and of course, Japan always seem short-changed in that regard.
One shortcoming of investment-led growth is the traditional Harrod-Domar issue: it is difficult for aggregate demand to keep up with the additional supply capacities created by previous investment. This is probably less of a problem in underdeveloped economies where improvements in standards of living are badly needed (provided, of course, that the capacities of production are used for internal markets rather than exports to developed countries). But it is definitely a concern for mature economies. As a result, in the latter case growth should be refocused on socio-ecologically durable domestic consumption. At the same time, it is important to avoid the financial dynamics that have been at play in the United States. The United States has been following a strategy of consumption-led growth for the past 30 years, but it has been based on unsound financial practices induced in part by growing income inequality. Japan has less of that problem.
Another shortcoming of investment-led growth is that it is prone to Ponzi finance. The economist Hyman Minsky explained in detail how investment was prone to income-based Ponzi finance. As we observed in the wave of mergers and acquisitions in the 1990s and more recently in the US housing bubble of the 2000s, investment is also prone to collateral-based Ponzi finance. Indeed, it creates durable assets that may rise in value, thereby providing an incentive to underwrite loans on the basis of rising asset prices rather than income. While rising collateral-based lending might be fine in financial markets, especially when no government insurance is provided, it is more dangerous in the case of durable illiquid assets such as investment goods.
It is also important to reexamine the goal of growth regardless of its sources. While economic growth may help to improve standards of living and to meet the needs arising from population growth, it is not clear that there is a direct relationship between improved welfare and economic growth, especially for developed economies. The case of Japan shows us that we need, alternative measures to the Gross Domestic Product, such as the Genuine Progress Indicator, (which incidentally show no significant improvement in U.S. economic welfare since the mid-1970s – so who has really experienced ‘lost decades”?). Rising socio-economic and environmental problems have outweighed the gains from increased final output. It’s time to move away from the simple caricature of Japan and consider whether we need a better way to measure economic progress.