Stimulate supply, not demand

FOLLOWING LINKS on the Internet can lead to serendipitous discoveries. Getting clicky last night popped up the Super Economy site written by a Kurd/Swede who goes by the name of Tino.

Tino usually focuses on the American economy, but he takes a look at Japan in a post from 23 May this year. The post may be three months old, but don’t let that stop you from reading it–he says what a lot of people in Japan aren’t willing to say, and his advice is not time-dependent. The title is Japan’s Problem is Supply, Not Demand, and Tino thoughtfully includes several charts. His first argument:

Japan has simply not been growing slower than other advanced countries once we adjust for demographic change.

After presenting some statistics, he concludes:

Between 1990-2007, GDP per working age adult increased by 31.8% in the United States, by 29.6% in EU.15 and by 31.0% in Japan. The figures are nearly identical!

Then he takes on Paul Krugman, which these days is like shooting fish in a barrel:

Next, to Krugman’s point that the problem is “policy makers… doing too little” (by which he means spending too little). Japan has been running Krugman-Obama sized deficits averaging about 5% of GDP for a decade and a half…Krugman is simply dogmatic when he claims that Japan’s policy of massive deficits failed because the deficits were not large enough(!)

That leads to his next point:

Krugman is obsessed with demand, and ignores the (usually) far more important factor, which is supply.

(A)djusting for population, Japan has simply not been doing that badly in growth terms. Their problem now is their debt, which they have thanks to Keynesian policies. Capacity utilization is high in Japan, including a low unemployment rate. Stimulating demand just won’t do it when the problem is supply. If Japan wants growth they have to go for supply factors, including hours worked.

He adds in an update:

Japan also illustrates the problem of over-zealous, imprudent Keynesianism. If they had not undertaken massive deficits in the 2000s (when there was no need, and perhaps not even opportunity, for policies aimed at stimulating demand rather than supply) they would have had dry powder now. There is no guarantee that two crises cannot come within a couple of decades. Instead, the Japanese state is immobilized by their fiscal past.

Here are some other ways to stimulate supply:

• Reducing taxes
• Reducing unemployment benefits
• Raising the retirement age
• Facilitating bankruptcy, particularly of companies that are deemed “too big to fail”
• Expanding the labor force with large-scale immigration

The idea is to bring down the prices of products purchased with discretionary spending that people usually avoid because they’re too expensive. In other words, stimulating supply ultimately stimulates demand.

The last of the five methods would not necessarily benefit Japan, and might cause serious cultural problems. Very few countries are emotionally equipped to assimilate large numbers of immigrants; places such as the United States and Canada are exceptions. Further, the larger the influx of immigrants, the more likely the immigrants will refuse to assimilate.

This should have been clear from the European example, but short of starvation or immediate threats to their safety, the elites that push immigration will always choose a desktop theory over reality. In this case, the desktop theory is, “Imagine there’s no countries, it isn’t hard to do…imagine all the people, sharing all the world.”

Prime Minister Kan favors stimulus of demand, and is not at all interested in stimulating supply. His policies (or more accurately, those of his economic tutors) will not succeed in the long run.

Afterwords:

The comments to Tino’s post are also worth reading.

Word hasn’t filtered into Japan, but Paul Krugman has become the economist’s equivalent of the bearded nut on the sidewalk. A lot of people are now entertaining themselves with the game of shooting the ideas of a Nobel laureate full of holes, and Mr. Krugman obliges by puffing himself up into a larger target.

Here’s how I stumbled across Tino. The charts alone should be of interest.

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