Bad ideas that never die

As usual, Prime Minister Kan keeps repeating that the (income) gap is growing because of “excessive market fundamentalism”. As long as he views the problems facing Japan precisely the opposite way (of how he should), the Japanese economy will not recover.
- Ikeda Nobuo

We have so many people who can’t see a fat man standing beside a thin one without coming to the conclusion the fat man got that way by taking advantage of the thin one. So, they’re going to solve all the problems of human misery through government and government planning.
- Ronald Reagan (1964)

ONE CAN almost be sympathetic with the desire of the Japanese left to implement their pet theories now that they’re in control of a government for the first time since the LDP merger of 1955. (Socialist Prime Minister Murayama Tomi’ichi from 1994-1996 doesn’t count; he had to promise not to behave like a socialist before the LDP let him serve as a figurehead.) The American Democrats enjoy playing the song Happy Days Are Here Again at their party conventions; the theme song for the Japanese Democrats inebriate from their first draught of power, however, might well be Happy Days Are Here at Last.

But note that I said almost sympathetic. The average Japanese pol doesn’t pay close attention to what happens overseas, so most of them aren’t tuned in to what’s worked or what hasn’t for economies in other countries. In addition, the average leftist, Japanese or otherwise, doesn’t pay close attention to what works anywhere. Their primary concern is the dogma, even if the citizens wind up living in equally sized dog houses with equally sized, half-empty feed bowls. That was their attitude in 1964, just as it was in 1864 and just as it will remain in 2064. Far better to be politically correct than to be economically correct. Besides, it’s not as if they’ll be the ones to suffer.

That’s why the new DPJ government of Kan Naoto, which represents the older, more leftist DPJ before then-party head Kan Naoto let Ozawa Ichiro join, is pleased as punch to offer as a solution to Japan’s problems the idea of steering the car in the direction of the ditch.

From The Wall Street Journal:

Japan’s new finance minister will push to raise taxes on high earners in an effort to boost revenue and narrow the country’s income inequality, he said in an interview published today.

‘I believe we are at a stage where a little bit of egalitarian thinking should guide our tax policy,’ Yoshihiko Noda told The Wall Street Journal.

“Egalitarian thinking”? A flat tax, perhaps?

‘In that sense, our tax reform will be designed with an eye toward restoring its income-redistribution function,’ he added.

Translation of egalitarian thinking: Pursuing equality of outcome by taking money from the people who carry the water and giving it to those who drink it.

Does Mr. Noda realize that increasing taxes on the wealthy never brings in the revenue people claim it will? (Unlike Barack Obama, who admits that he knows but doesn’t care.) The highest rate in Japan is 40%, down from 75% 30 years ago. Does Mr. Noda understand that beyond 40% is the level at which people start to limit and hide their income?

Do you have to ask?

Prime Minister Naoto Kan’s new administration hopes to revive confidence in Japan by introducing a new era of fiscal discipline and beginning work on reducing the industrialised world’s biggest public debt mountain.

Confidence might already have been revived had he come to those conclusions when he was Deputy Prime Minister/Finance Minister earlier this year, before adding to the fiscal indiscipline and the industrialized world’s biggest public debt mountain. Perhaps he didn’t want to let a crisis go to waste.

*****
Ono Yoshiyasu, Mr. Kan’s home tutor for the study of public finance and economics, appeared on an interview program last week and demonstrated that he doesn’t pay close attention to events overseas, either. He justified greater government intervention in the economy by starting a sentence with the phrase, Minkan ni hottoittara…(Leaving it to the private sector). It’s not possible to convey in a snappy translation the deliberate nuance that he thought leaving affairs to the private sector would be tantamount to criminal negligence.

Instead of the private sector, which provides the greatest prosperity for those willing to work for it through a rational, reality-based system, he would rather entrust matters to the public sector and the tenured academics that never have to pay for their mistakes.

*****
Had they been paying attention, they could have read this from Britain:

It simply demonstrates something that free market economists have always known, namely that, because of the law of dispersed costs and concentrated gains, governments will always find it easier to raise taxes than to cut spending. Not that this concession has appeased Left-wing pundits, who are insisting that the budget is unfair to the poor. It is true, of course, that any spending cuts will necessarily affect net beneficiaries of state expenditure more than net contributors. But is it right to measure the compassion of a society by the size of its welfare budget? Surely the whole purpose of social security should be to draw people out of dependency so that budgets, over time, can fall. By lifting personal allowances, the government is doing its best to facilitate this process. As Art Laffer says, if you pay people to be poor, you’ll never run out of poor people.

Or this from the United States, titled The Keynesian Dead End:

Today’s G-20 meeting has been advertised as a showdown between the U.S. and Europe over more spending “stimulus,” and so it is. But the larger story is the end of the neo-Keynesian economic moment, and perhaps the start of a healthier policy turn.

For going on three years, the developed world’s economic policy has been dominated by the revival of the old idea that vast amounts of public spending could prevent deflation, cure a recession, and ignite a new era of government-led prosperity. It hasn’t turned out that way.

…Now the political and fiscal bills are coming due even as the U.S. and European economies are merely muddling along. The Europeans have had enough and want to swear off the sauce, while the Obama Administration wants to keep running a bar tab. So this would seem to be a good time to examine recent policy history and assess the results.

Like many bad ideas, the current Keynesian revival began under George W. Bush. Larry Summers, then a private economist, told Congress that a “timely, targeted and temporary” spending program of $150 billion was urgently needed to boost consumer “demand.” Democrats who had retaken Congress adopted the idea—they love an excuse to spend—and the politically tapped-out Mr. Bush went along with $168 billion in spending and one-time tax rebates.

The cash did produce a statistical blip in GDP growth in mid-2008, but it didn’t stop the financial panic and second phase of recession. So enter Stimulus II, with Mr. Summers again leading the intellectual charge, this time as President Obama’s adviser and this time suggesting upwards of $500 billion. When Congress was done two months later, in February 2009, the amount was $862 billion. A pair of White House economists famously promised that this spending would keep the unemployment rate below 8%.

Seventeen months later, and despite historically easy monetary policy for that entire period, the jobless rate is still 9.7%.

Or, if income gaps really troubled them, they could have read this from a tax professor:

The gaps in after-tax income between the richest 1% of Americans and the middle and poorest fifths of the country more than tripled between 1979 and 2007 (the period for which these data are available), according to data the Congressional Budget Office (CBO) issued last week. Taken together with prior research, the new data suggest greater income concentration at the top of the income scale than at any time since 1928.

But:

What (the survey) does not show, and what is not to be automatically inferred from it, is that the poor and the middle-class have gotten poorer. Of course, I fully expect the tax-the-rich types to suggest that very thing. But by doing so they only betray one of their many faulty premises: Namely, that wealth, like energy, is finite and an increase in one individual’s wealth is always be matched by a commensurate decrease in another individual’s wealth.

Or, this question from the comments:

Would it make people happy if they found that the gap had closed but everyone is worse off?

I think we already know how some people would answer that.

*****
One of the few beneficial effects of policies such as those endorsed by the DPJ is that it increases the urgency and sharpens the arguments of those in the opposition. (Barack Obama is demonstrably the best thing to have happened to the small government movement in the U.S. in more than a generation.)

Here’s university professor, author, and blogger Ikeda Nobuo (writing in Japanese):

Another economist influencing Prime Minister Kan is Jinno Naohiko, the head of the panel of experts in the National Tax Commission. He’s the person who came up with the slogan, “Strong economy, robust finances, and strong social welfare”. He (recently) issued an interim summary of the panel’s debate, but it is composed of his personal impressions rather than the response of the commission. He has a unique fiscal theory, and the commission seems to be in turmoil as a result.

Rather, it would be more accurate to say that Mr. Jinno has no fiscal theory at all. That’s because he is a rump Marxist economist…He hasn’t written a thing about economics in this book (no link), but it’s filled with so much abuse of “neo-liberalism” that reading just short excerpts is enough to make one ill.

The idea that that neo-liberalism convincingly preaches spontaneous cooperation such the family or the community is laughable. Neo-liberalism envisions homo economicus, who rationally behaves through the instantaneous calculation of pleasure or hardships. In other words, it is a view of people in which cooperation with others, or sharing, is not possible.

If there is deregulation of the labor market in accordance with the tenets of neo-liberalism, the income distribution in the market will be unequal. If this inequality becomes pronounced, it will cause fissures in society, and social unity will become impossible. Neo-liberalism aims for small government, but it insists on a strong government that oppresses democracy.

Everyone should easily understand that neo-liberalism is a reaction against history. In fact, neo-liberalism does not present a vision for a new age, but sincerely intends to uphold the dominating benefits of destruction.

When the conditions for small government are absent, the tragedy of forcibly maintaining small government is the performance of the poverty and income gap tragedy presented by neo-liberalism. Neo-liberal policies have been forced on Japan since the inauguration of the Nakasone Administration in 1982.

That’s how he repeats the lie that the Koizumi reforms caused the income gap to grow. Jinno also argues for the creation of a robust economy with a strong social welfare component, but the relationship of cause and effect is reversed. Normal economics assumes that social welfare cannot increase unless the economic growth rate rises. The Marxist economists think a planned economy that increases the distribution to the working class will increase the growth rate. Their ideal seems to be a citizen burden of 70% on the order of Sweden. Therefore, they think Japan, where the burden is only 40%, should have a larger government and share the wealth through welfare giveaways.

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They also could have read this by Yamaguchi Natsuo, the head of New Komeito, from a speech on the 26th in Chiba:

Prime Minister Kan says the economy will improve even if taxes are raised, as long as the funds are spent properly. But both American and Japanese scholars say that when consumption is frozen, the economy will worsen. We’ve had that experience in the past, with the coalition government of 1997. They raised the consumption tax from 3% to 5%, and the economy got worse. One of the members of that Cabinet was Prime Minister Kan.

See what I mean about ignoring the lessons of the past?

*****
If they were willing to put their policies where their mouth is, they could take up the proposal of Dr. Z at Gendai Business:

There are still some concerns that Prime Minister Kan, Chief Cabinet Secretary Sengoku Yoshito, and party Secretary-General Edano Yukio are all economically tone deaf.

All three have boldly stated outrageous theories in public that would ordinarily be inconceivable. Prime Minister Kan says the economy will improve even with tax increases. Mr. Yoshito says that alleviating the supply and demand imbalance will be bad for the economy. Mr. Edano says the economy will improve if we raise interest rates. The rest of the world will not take seriously public officials who make statements such as these.

Here’s an idea for Mr. Kan: Raise taxes and interest rates, see if the economy improves, leave the supply and demand gap as is, announce that the unemployment rate is fine as it stands now, and then ask the people if they believe you.

*****
Mr. Edano is suggesting again that having Your Party in a coalition after an election would be just dandy, now that it appears the DPJ won’t win an outright majority in the upper house. That would be a good idea, assuming he would listen to party head Watanabe Yoshimi:

Mr. Kan often talks about Greece. We hear him call for raising the consumption tax because the Greeks went bankrupt. But the Greek consumption tax rate when it went bankrupt was 21%. To say that we won’t go bankrupt if we raise the consumption tax is a pack of lies. We must not be fooled by ridiculous economics based on magic charms.

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We already know they don’t listen to Nakagawa Hidenao, the unofficial spokesman for the LDP Koizumians:

Mr. Kan said, “The first (areas) to suffer in Greece were pensions and salaries.” The average public sector salary in Greece is 1.5 times that of the average private sector salary. This gap is the largest of the OECD countries. Pensions in Greece are roughly the same as the salaries of the people actually working. In Japan, pensions are only 30%-40% of those salaries. That demonstrates the high level of pensions and public sector salaries in Greece to begin with.

*****
Perhaps they were reading only selected material. One example might have been this recent headline in the International Herald Tribune:

U.K. Tightens Belt Despite Hard Times

“Despite”? Yes, everyone knows that hard times surely require profligate economic measures.

Well, everyone at The New York Times or The Washington Post. That’s where the IHT obtains most of its content.

They might also have been reading the editorials of the major Japanese dailies. On his Japanese language blog, Kishi Hiroyuki, a former aide to Takenaka Heizo when the latter served as Minister of Internal Affairs and Communications under Prime Minister Koizumi, reviews those editorials published after the DPJ released its platform for the upper house election on the 17th.

The Nikkei Shimbun:

Drastic reform of the taxation system, including the consumption tax, is a difficult subject because the LDP administrations kept putting it off. We welcome the prime minister’s decision to reveal his basic thinking about increasing the consumption tax before the upper house election.

The Asahi Shimbun:

The consumption tax rate is not a simple method for rebuilding finances…it is an issue related to the basic design of the country. A multiparty forum should be established immediately after the election to examine the issue and to rapidly determine a course of action.

The Sankei Shimbun:

Prime Minister Kan has broached the subject of dealing with the tax rate and reform proposals, including some reactionary measures. The idea of moving to a course to rebuild the nation’s finances is itself a desirable change.

The Yomiuri Shimbun:

It is a political responsibility to clearly declare the necessity (for a tax increase), even if it is accompanied by some pain for the citizens. We hope to hear some lively debate during the campaign.

The only discouraging word was from The Tokyo Shimbun:

Rather than (raise) the consumption tax, the first step that should be taken is to work together in a multiparty arrangement to eliminate waste from government.

Wrote Mr. Kishi:

What is behind this low level of editorial from Japan’s major newspapers? A plurality of citizens favors raising the consumption tax in polls, but aren’t they bound to make an error in judgment after reading these distorted editorials?

After the cabinet presented its fiscal strategy on the 22nd, the tone of the editorials the following day was that an increase in the consumption tax was required because fiscal reconstruction was difficult. This is nothing but “war correspondent” journalism.

I was well aware of the level of the newspaper media in Japan before this, but I was surprised once again to read the editorials about the increase in the consumption tax. This is no different than (their) rubber-stamping (of) the mistaken policy decisions of the military during the war…If this type of editorial is all they’re capable of, the Japanese newspaper media does not support journalism at all…If they’re going to survive in the Internet age, they’ll have to start by raising the quality of their editorials and articles before they think about reworking their business model.

*****

The DPJ’s thinking is based on the premise that the Koizumi reforms were bad. Some people have decided they can no longer sit still for that one, however. This interview with Shinbo Masaki appeared last week in J-Cast.

Were the Koizumi structural reforms bad? With the privatization of Japan Post and the issue of dispatching workers, policies and the tone of debate that reject the structural reforms have become the mainstream in politics. We interviewed Shinbo Masaki, the managing director of JAIS. He sounds the alarm that Japan is headed for serious decline if it does not again serious consider reform and its concomitant pains, rather than superficially attractive arguments about saving the weak.
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In your recent book, Nihon Keizai no Shinjitsu (The Truth about the Japanese Economy, written with younger brother Jiro Shimbo, an executive with Yomiuri TV), you dealt with evaluations of the reforms of former Prime Minister Koizumi Jun’ichiro, such as the privatization of Japan Post. You sharply criticized the oft-heard argument that the Koizumi reforms deprived young people of employment.

That argument is a big lie. Let me say at first that I do not approve of all the reforms of Koizumi and Takenaka. But let’s look at the numbers during the Koizumi administration. While improving the fiscal balance of accounts, stock prices rose, the rate of GDP growth increased, there was a dramatic climb in the rate of hires for new high school graduates, and the unemployment rate fell.

As for the alleged growth in income gaps, the growth rate of the Gini Coefficient, the most frequently used indicator of that gap, slackened compared to the four or five years before he took office, while it expanded in Western countries.

What specifically do you think he did right?

As a starting point, he understood very well the position we were in, that with the globalization of the international economy, companies had to survive international competition. Good or bad, like it or not, those are the cold, hard facts. Japan had become inefficient and had lost competitiveness. To recover that vitality, he identified where the reforms should be implemented, what hardships would have to be endured as a result, and what effects they would have.

It is important to clearly specify the negative aspect of hardships. Politicians before then, and even today, continue to spread the pork to maintain the illusion that they are making everyone happy. They’ve also continued to increase the government’s debt. In this case, the “everyone” they are talking about is today’s “everyone”, while they’re passing the bill on to the “everyone” of the future.

When people think of the Koizumi reforms, they usually think of the privatization of Japan Post. Now, however, we’re on the verge of passing Japan Post reform legislation that would mark a retreat from privatization.

The Japan Post privatization in particular was an issue regarding the postal savings accounts. That symbolized reform because its intention was to create vitality by transferring the funds from the inefficient investments of government to the efficient investments of the private sector. A retreat from this path will accelerate the impoverishment of Japan.

In addition, the Koizumi administration dealt with the problem of the mobility of labor by removing restrictions on the seconding of employees in the manufacturing industry. Mobility should be considered in a form that includes full-time employees, but there are severe restrictions in Japan on laying people off, so companies won’t hire. They made a start by dealing with that tendency.

Just before you said that you didn’t agree with all the Koizumi reforms. What negative aspects did they have?

When they provided mobility to the workforce, they put off paying attention to those people who were laid off. Those people who were laid off needed study and training to improve their skills for moving to the next dynamic company. This required the creation of facilities, subsidies, and the enhancement of the safety net for a specified period until they found new jobs.

After Koizumi left office, a debate should have been held on the best way to provide a safety net, but the trend gradually shifted to tightening regulations to protect employment. Now these regulations have in fact been tightened. Companies are concerned this will have the opposite of the intended effect for Japanese workers. It will create a reality in which people will not be hired in Japan, and they will not be able to hire people overseas. This has already started to happen.

In regard to this problem of government debt and guaranteeing social welfare payments, Prime Minister Kan Naoto indicated that he is resolved to bring up the unpleasant-sounding question of increasing the consumption tax.

A discussion of tax increases is something different than the necessity of a growth strategy that includes structural reform. Until Japan conducts structural reform to become a country that can maintain its competitiveness, it will start a new and gradual decline even with a tax increase to improve the fiscal side. It is important to show a clear growth strategy.

What should voters pay attention to when they compare the growth strategies of all the parties before the upper house election?

Distrust the rose-colored glasses approach and the pie-in-the-sky with no specific numbers. The money is limited. If you devote your attention to one area, you will have to do without in another. Nothing will change with the gradual decline of Japan if we keep dithering and doing the same things we’ve always done. We have to examine how much a specific action will cost, what we will have to give up to implement that action, whether it will require a tax increase, and whether the specific advantages and possible pain have been clearly shown. It is also important to make efforts to alleviate concerns about the future, such as with pensions.

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One can almost be sympathetic with the Japanese voters for being swayed by the DPJ claims. They’ve never lived under a serious government of the left before, so they’ve never seen how these programs constitute a willing leap from the frying pan into the fire to ensure that everyone is equally singed. That’s a lesson that every generation in the United States has to relearn.

Let’s hope this generation of Japanese voters learns that lesson before the car winds up in the ditch.

Afterwords:

Once people start using a political catchphrase, it’s not long before they start misusing the term by arbitrarily giving it whatever meaning appeals to them. A recent example is the term neo-liberal. The following are excerpts from an article titled Neoliberalism: The Genesis of a Political Swearword.

(T)he relatively little known Alexander Rüstow delivered the most noticed speech at the (1932) conference, which was later published and republished many times. Until the present day, it is widely regarded as the founding document of neo-liberalism.

The speech was titled ‘Freie Wirtschaft, starker Staat’ (Free Economy, Strong State), and in these four words we can already see Rüstow’s basic economic creed…Rüstow blamed excessive interventionism for the economic crisis. He also warned of burdening the state with the task of correcting all sorts of economic problems. His speech was the clear rejection of a state that gets involved with economic processes. In its place, Rüstow wanted to see a state that set the rules for economic behaviour and enforced compliance with them. It was a limited role for the state, but it required a strong state nonetheless. Apart from this task, however, the state should refrain from getting too engaged in markets. This meant a clear ‘No’ to protectionism, subsidies, cartels—or what today we would call ‘crony capitalism,’ ‘regulatory capture,’ or ‘corporate welfare.’ However, Rüstow also saw a role for a limited interventionism as long as it went ‘in the direction of the market’s laws.’…

Although contemporary supporters of a ‘Third Way’ claim to be fighting neo-liberalism, to Rüstow this very same ‘Third Way’ was neo-liberalism. He called it neo-liberalism to differentiate it from earlier liberalism, for which Rüstow frequently used derogatory terms such as ‘vulgar liberalism,’ ‘Manchester liberalism,’ or ‘paleo-liberalism.’ Rüstow wanted to break with this old liberal tradition to put a new liberalism in its place—hence the prefix ‘neo’….

Rüstow’s differentiation between the state as the guarantor of economic order, as the rule-giver that stands above economic processes, and the failed interventionist state that meddles with economic processes and gets easily captured by special interests, are still valid. It would be worth to rediscover them, especially today….

The discussions about the proper political reactions to the global financial crisis are, sadly, not as nuanced as they could be. For example, when we read Kevin Rudd’s ‘anti-neoliberal’ essay we find some strong language right from the first paragraph where he blames ‘free-market fundamentalism,’ ‘extreme capitalism,’ and ‘excessive greed’ for our economic problems….

Neo-liberalism is a far richer, more thoughtful concept than it is mostly perceived today. First and foremost, it emphasised the importance of sound institutions such as property rights, freedom of contract, open markets, rules of liability, and monetary stability as prerequisites for markets to prosper and thrive. It seems that the global financial crisis has once again demonstrated how important these core insights of neo-liberalism are.

To those criticising neo-liberalism today, the answer may well be just that: We need more of this kind of neo-liberalism, not less. What we would need less of is only the rhetorical abuse of neo-liberalism for political purposes.

Kevin Rudd isn’t the only one who likes to throw around the term “free-market fundamentalism”. Take a look at that quote from Prof. Ikeda at the top of the page again.

Former Financial Services Minister Kamei Shizuka liked it too.

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