AMPONTAN

Japan from the inside out

The worst and the worse

Posted by ampontan on Sunday, September 12, 2010

If there’s one thing I’ve learned up here (in Washington)…the only way to get Congress to balance the budget is to give them no choice, and the only way to keep them out of the cookie jar is to give them no choice, which is why – whether it’s balanced budget acts or pay as you go legislation or any of that – is the only thing. If you don’t tie our hands, we will keep stealing.
- Tom Perriello, Democratic Party congressman from Virginia

Current Keio University Professor and Former Man of Many Portfolios in the Koizumi Cabinet, Takenaka Heizo, last week described the Democratic Party of Japan presidential election as a contest between “the worst and the worse”. He didn’t specify which one of the candidates was which, but deciding which tail to pin on those two donkeys would be enough to stump anyone.

Here’s what the former Minister for Economic and Fiscal Policy and Minister for Financial Services said about Kan Naoto:

There are no experts who think Japan’s economy will improve with Prime Minister Kan’s economic policies.

And about Mr. Ozawa:

His approach to democracy is extremely unsound. Historically, when the conflict between political parties creates a stalemate, dictatorships emerge.

Mr. Kan was challenged by an interviewer earlier this week on his view that employment drove economic growth, rather than the opposite. He answered:

If the national government provided subsidies for the salaries of long-term health care workers, for example, to increase employment, it would enhance those services and boost consumer demand. Economic growth would result.

He plans to fund those subsidies, of course, with a massive consumption tax increase. The best description of measures of that sort is Your Party President Watanabe Yoshimi’s analogy of an octopus feeding off its own tentacles.

The people who filled Mr. Kan’s head with these sugarplum visions must realize fiscal stimulus of this type is a sugar high whose growth ends when the stimulus ends. The only sustainable growth achieved is in the money the government filches from one set of pockets to place in another. How is the employment supposed to continue when the subsidies stop? Regardless of whether the subsidies to hire more long-term care workers are a short-term measure or a long-term government employment program, they are little more than a form of unemployment compensation.

Is not the conclusion inescapable that they don’t want the subsidies to stop? More money under the control of the government and the bureaucracy is where they perceive their interests to lie. In Mr. Kan’s case, it has the advantage of being in accord with his political philosophy.

The long-term health care industry isn’t even a true growth sector. Even assuming a rise in consumption from the workers employed with the subsidy money, the revenue from the services they provide depends on the social insurance premiums paid by the public. Which is more likely to result from rising social welfare expenditures for an aging population: families spending more disposable income, or increasing their savings in anticipation paying for those welfare expenditures? One of Mr. Kan’s economics tutors, Ono Yoshiyasu, would attribute the higher savings rate to the public’s “love of money”, rather than to the public’s common sense. Yes, ivory towers populated by social engineering elites with little or no real-world experience also exist in Japan.

This outlook also ignores the true engine of growth, which is not consumption, much less consumption resulting from artificially created employment. The factor that spurs economic growth is net private-sector investment. Mr. Kan might benefit from reading that link:

Politicians, if they truly wish to promote genuine, sustainable recovery and long-run economic growth, need to focus on actions that will contribute to a revival of private investment, not on pumping up consumption.

But Mr. Kan, a lifelong leftwing citizen activist, was unfavorably disposed toward the supply side even before his recent remedial economics tutorials began.

The prime minister might be an all-in-one package of the worst and the worse himself. Here is his answer to a similar question in a different setting:

Q: You’ve brought employment policies to the forefront. What specific policies do you have in mind?

A: There are three elements. The first is to create hiring by such means as long-term care, for which there is long-term, latent demand, and relaxing the issuance of visas to foreigners. The second is (ameliorating) the mismatch between (job-seekers and employers, i.e., more of one than the other). One more is protecting employment to prevent the disappearance of jobs when plants move overseas. Employment will be created by providing subsidies to build new plants for a low-carbon society.

That idea of issuing more visas to foreigners came out of nowhere, by the way, and so far hasn’t generated much comment. How many visas he would issue to whom and for what jobs, he hasn’t specifically addressed. This wouldn’t be the first time he regurgitated undigested briefing material: His blunder about discussing a consumption tax increase during the recent election campaign was another example. One wonders what other schemes are being discussed behind closed doors that he’s managed to keep from blabbing about so far.

And as for green jobs stimulus, even the Socialist government of Spain admits their program was a disaster that cost the country 2.2 jobs for every one it created.

The punch line to this sick joke is that the English-language media and commentariat are peddling the story that Mr. Kan is a “fiscal conservative”, thereby obliterating what little credibility they had about people and issues in Japan to begin with. One suspects their journalistic probes went no further than the nearest source in the Finance Ministry, which already has the Japanese print and broadcast media marching in lockstep and sounding off about the necessity for a consumption tax increase.

Now comes word on Friday that the Cabinet of Mr. Fiscal Conservative has approved another stimulus, this one worth $US 10.9 billion:

“We will ensure growth by laying the basis for employment and ensure employment by encouraging growth,” Kan told his economic ministers.

He probably thinks that was a clever line.

Ozawa Ichiro

At least Mr. Kan has the excuse of his lifelong political philosophy. Ozawa Ichiro has no excuse at all.

In fact, he seems to have forgotten the practical wisdom of his political patron and father figure, Tanaka Kakuei. Here’s an excerpt from Mr. Tanaka’s 1972 book, Building a New Japan:

Some people claim that high growth isn’t necessary, or that they would rather not see industrial development, or that we should enhance welfare services in the future instead. But it’s a mistake to think it must be a choice of either growth or welfare, or either industry or the lives of the people. Social welfare is not bestowed upon us by heaven, nor is it something provided from overseas. There is no other way to obtain the funds required than to use the vitality of the Japanese people to expand the economy, and to create that society through economic strength.

Instead, Mr. Ozawa now speaks in non sequitur:

Everyone wants to hear about what we can do to expand employment. We must be forward-looking about improving the economy with public spending.

It gets even worse. As reported in the 13 September issue of the weekly Aera, he says that extraordinary measures are required because conventional policies are unlikely to lead to recovery. One of these extraordinary fund-procurement measures he touts is the securitization of national assets. He claims this will raise the money to pay the bills for all the pork in the 2009 DPJ manifesto that the country can’t afford. In some cases, he seems to be using the term securitization loosely, by referring to the conversion of housing for civil servants into homes for the elderly, or the public/private joint use of public buildings as a revenue source.

For example, he would issue zero coupon bonds to obtain the money for highway construction. Instead of receiving interest payments, those who bought the bonds would be exempt from inheritance tax. The government would benefit by getting off the hook for some or all of the JPY 7.7 trillion in interest payments that they paid last year.

But it’s immediately obvious that the bond purchasers will not be exempt from inheritance tax. They’re just making a deal with the government to pay a lump sum in advance and call it by a different name.

The Mainichi Shimbun points out only 4% of all estates are large enough to trigger the payment of an inheritance tax. The government received JPY 1.3 trillion in revenue from these taxes in FY 2009. It would require a substantial amount of tax exemption for this scheme to work, which means the government would receive less revenue over the long term.

The Mainichi also noted this is not the first time the idea has been floated. It was suggested during the Hashimoto administration in 1997 as a way to retire the pre-privatization debt of the Japan National Railway, during the Mori administration as a way to raise revenue in 2000, and during the Aso administration in 2008 as an economic stimulus. Yet it’s never been adopted.

In some cases, the scheme would also “securitize” government-owned office buildings and residential properties by selling them to investors. The government would continue to use the properties for a rental fee, while receiving the income from the sale. If any securities are issued, it would be by the purchaser of the property, who would use the land, buildings, and the rental income as collateral. The Finance Ministry doesn’t care for this idea. They say it could generate losses over the long term, i.e., after the amount of the rental payments exceeds the revenue received.

Others have noted that at the end of FY 2008, the government’s assets totaled JPY 665 trillion, with fixed assets and real estate amounting to JPY 183 trillion. Of the latter category, however, roads, bridges, military bases, and other public financial assets that do not generate revenue accounted for JPY 143 trillion. Mr. Ozawa said he would securitize JPY 200 million worth of assets. What exactly does he intend to securitize?

Mr. Kan offered his opinion on the matter, which is of interest to those who would like to know the Finance Ministry’s view. Here’s what he had to say on NHK:

The securities would have little liquidity, and the interest payments could be higher than for bonds. I’m studying this, but it would be difficult.

Difficult in Japanese is a euphemism for impossible. When he said “study”, he used the expression benkyo suru, as if he were in school, rather than study in the sense of examine. Give him credit for honesty.

Some speculate Mr. Ozawa is not offering a serious proposal, but rather an overture to Your Party for an ad hoc coalition if he were to win the election. In their upper house election platform earlier this year, Your Party called for securitizing two-thirds of the government’s JPY 500 trillion in financial assets. (Your Party does think outside the box, but some of their ideas shouldn’t be taken out of the box to begin with. During the dark days of 2008, Watanabe Yoshimi seriously suggested that the government issue a second, temporary currency.)

Precedents

Few government securitization schemes have been implemented in Japan. Niigata Prefecture successfully raised money in 2006 using a residential building for prefectural employees they owned in Tokyo’s Kita Ward. They “securitized” it, but it was a de facto sale of the land to real estate developer Morimoto for JPY 2.5 billion, as the prefecture’s website clearly states. (Configuring the sale as a securitization gave everyone tax breaks.) Morimoto tore down the building and put up a five-story condo with 69 units for themselves and a seven-story building with 20 units for the prefectural employees. The prefecture pays rent to Morimoto for the latter building.

What actually happened is that the prefecture sold the rights to the land and its use to a special purpose entity created with the funds from the real estate developer. That entity issues the securities for sale, rather than the prefecture.

What did they do with the money? This is also on the prefecture’s website:

In regard to the connection with the prefectural baseball stadium, (the income from this transaction) exceeds the JPY 1.9 billion from general finances required for now, so we’ve gotten the funding we need.

There you see the problem. Niigata automatically expects that everyone will understand the need for a prefectural baseball stadium. But the people in Niigata and other prefectures who use baseball stadiums are high school teams, adult recreational leagues, and semi-pro teams. If those teams in the United States can get by playing their games on high school diamonds or in public parks with non-permanent bleacher seating and restroom facilities instead of the unneeded stadium superstructure, Niigata (and the other prefectures) could certainly do the same. They could have spent that money on essential services, or better yet, not spent it at all.

Unfortunately, the Japanese public’s sense of urgency for tying the hands of the politicians flares up only sporadically and hasn’t reached the prairie fire proportions of the United States. The American movement arose only because of the combination of a severe economic downturn, a rapid increase in unemployment, and stimulus programs that succeeded mainly in throwing money down the public sector rat hole. The ruling elites here are perhaps not as overtly arrogant as those in the United States, but they compensate with the blithe nakedness of their self-interest. The Japanese electorate is more than willing to throw the bums out when the opportunity presents itself, but their righteous anger has yet to manifest as a sustained force.

That might change before long, however. Whether the DPJ chooses the worst or just the worse in this week’s election, their stewardship of the Japanese economy is about to become a lot uglier.

Yes, Japan has a serious debt problem. The solution to a debt problem, however, is to stop spending money you don’t have–not to allow the people who are responsible for the problem to figure out ways to find more money to spend. There’s no reason to reward failure.

Afterwords:

Another strain of thought that has yet to appear in the public debate is the one expressed by David Warren of Canada:

(T)he only measure that can possibly save us from riding over that cliff…is, quite frankly, the complete dismantlement of the Nanny State, and the restoration of the status quo ante — governments focused on the provision of national defence, and domestically on the machinery of law and order. Full stop.

While that happens to be the only available formula for mitigating our impending economic and social catastrophe — leave people free not only to earn, but to help each other flexibly and directly — the issue of freedom itself lies deeper. For the Nanny State isn’t, and never was, compatible with the organic development of a free society. We do need laws to be enforced against specific, definable evils. But insofar as we are adults, we have never required comprehensive daycare.

Political criticism in Japan is often framed by saying that an opponent’s idea or behavior is counter to the principles of democracy, but that misses the point. Democracy is not a principle, or a means to feed, inform, educate, or distribute money. It is instead the means by which the people hire their representatives in the legislative and executive branches of government.

The issue is not democracy. It is, as Mr. Warren observes, freedom.

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9 Responses to “The worst and the worse”

  1. 21st Century Schizoid Man said

    “We do need laws to be enforced against specific, definable evils.”

    I believe that specific, definable evils include monopoly and cartels. Do you agree?

    If you agree, where you draw the line between specific, definable evils and unspecifiable/non-definable? I am not opposing the point you and Mr. Warren raise, but i am just curious.
    —–
    Monopolies and cartels seem to have often been created by state policies as a means to regulate prices and sales. The solution is to not have those policies to begin with.

    The US has antitrust laws to deal with them otherwise, but governments can often abuse those laws.

    See this for a modern example.

    - A

  2. Roual Deetlefs said

    Ampontan.

    Will Japan go the way of Zimbabwe? What then are the parallels here ?

    Zimbabwe’s involvement in the Second Congo War, which began in 1998 and killed 5.4 million people, caused its government to spend billions. Its problems began to spiral out of control shortly thereafter. Following the confiscation and redistribution of land, agricultural output declined by 51% from 2000-2007, which contributed to a rise in unemployment (recently at an unbelievably high 94%).

    To undermine the internationally unpopular President, Robert Mugabe, the U.S. passed the “Zimbabwe Democracy and Economic Recovery Act of 2001.” This law imposed sanctions and eventually led the International Monetary Fund and financial institutions to abandon Zimbabwe. That loss of the ability to borrow money was the main catalyst of the out-of-control money printing in Zimbabwe. After its 2001 default on IMF loans and suspension of IMF voting rights, the government printed money in an attempt to repay these loans and regain its access to credit. This action failed to turn the tide.

    In order to keep the military loyal, Mugabe raised their salaries — and again, the only way to pay for it was via the printing press. Certainly, Mugabe’s government could have slowed government expenditures after the loss of external creditors, but he would have lost control of the government due to political unrest.

    The full article is here.

    And the Ambrose Evans Pritchard has this to say :

    Weak sovereigns will buckle. The shocker will be Japan, our Weimar-in-waiting. This is the year when Tokyo finds it can no longer borrow at 1pc from a captive bond market, and when it must foot the bill for all those fiscal packages that seemed such a good idea at the time. Every auction of JGBs will be a news event as the public debt punches above 225pc of GDP. Finance Minister Hirohisa Fujii will become as familiar as a rock star.

    Once the dam breaks, debt service costs will tear the budget to pieces. The Bank of Japan will pull the emergency lever on QE. The country will flip from deflation to incipient hyperinflation. The yen will fall out of bed, outdoing China’s yuan in the beggar-thy-neighbour race to the bottom.

    And the only reason this has not happened yet is because :

    The only reason why this has not yet blown up is because investors (mostly Japanese) have not yet had the leap in imagination required to understand their predicament, and act on it. That roughly is the argument of Dylan Grice from Societe Generale in his latest Popular Delusions note released today. “A global fiasco is brewing in Japan.”

    Japan’s deficits are already within the hyperinflation “red flag” zone identified by historian Peter Bernholz (”Monetary Regimes and Inflation” .. the Bible on this subject). As you can see from the charts below, prices start to spiral into the stratosphere once the deficits as a share of government expenditure rises above a third and stays there for several years.

    Ampontan, Japan needs a Ronald Reagan or a Margaret Thatcher. And as you so eloquently write, there does not seem to be anyone that fits the bill …

  3. 21st Century Schizoid Man said

    Ampontan:

    The example you gave me shows what you are saying, but my point was how old Standard Oil case can be prevented effecitively.

    Without anti-trust laws, do you think Toyota et al. combined together continue to create quality automobile, when it is the only source of automobile supply?

    How do you expect people to keep competition without law?

    So said, I am ok with the trial version of anti-trust-law-free society, though, partially because I am curious.

    It is also ironical to see how JFTC seems quiet and even powerless under DPJ government. May be to control JFTC to their liking, is DPJ’s idea, by reducing staff and threatening them through Jigyoo Shiwake.
    ——————-
    Didn’t say I was opposed to anti-trust laws, just making the point that governments often help monopolies and cartels form. For example, all the problems that American cars had to be sold in Japan in the 80s, to use the Toyota example.

    - A.

  4. kappnets said

    I like your discussion. I like Koizumi and Takenaka. However, your theory on freedom will not be understood/accepted by the Japanese people, who once praised Koizumi for rescuing Japan from bankruptcy but later discovered a drawback in Koizumi’s reform.

    My theory is that Japanese people are (historically) not so independent-minded as the Americans, and are today more socialistic-minded than before. We must assume that Japanese people are forbearing and hard working as far as they feel secure, protected by the leaders.

    Free society may be important, but you probably assume a labor market as free as in the US while the labor market in Japan is NOT free as in the US. In the seniority system in Japan, companies do not (cannot) axe their permanent employees. Once fired, the ex-permanent employee does not have good means to find another good job. Further, the companies today want to have non-permanent employees, whom they can easily axe. As a result, the Japanese found that freedom may create rich companies, but inequality increases unnecessarily. They had many homeless people year before last. The number of people who depend on welfare is increasing even today. This is what the Japanese learned from Koizumi (and possibly from the Wall Street companies). Unless this problem is solved, the vigorous reform as Koizumi once pushed forward will not start again.
    ——————
    K: Thanks for the note. Actually, I had a post about Koizumi’s popularity further down the page.

    - A.

  5. kappnets said

    I just wanted to discuss your opinion that the choice between Kan and Ozawa is the choice between worse and the worst is irrelevant.
    ————–
    One of them is going to be the next prime minister, and either one is going to be terrible, especially economically.

    Irrelevant? I don’t think so.

    - A.

  6. [...] wonder if the last two questions about foreign workers are in any way related to this article from Ampontan, in particular this quote from Naoto Kan, who is Prime Minister at the time of writing, but may not [...]

  7. bender said

    Niigata automatically expects that everyone will understand the need for a prefectural baseball stadium

    I saw this on TV the other day…seemed much more luxurious than Jingu and Yokohama stadiums…just had to shake my head. Hey, I believe that Keynesian economics works, but gotta doubt the motives behind Japanese regional(=chiho) pork-barrel projects.
    ———–
    B: If you think Keynesian economics works, you might be interested in this, as well as this.

    - A.

  8. mac said

    I salute Kappnets for their acuity regarding the labor market.

    One of the great contradiction of the so-called capitalist free market is that capital (money) demands to be free and move about internationally without limits while at the same time it refuses labor (the workers) the same right to do so.

    A truly free market would also allow workers to move about freely and follow the money internationally.

    Of course they will never allow that, so it is really just about money for the rich and binding the poor back to slavery.

  9. bender said

    Bill:
    Let’s not get into this. In the end, what happens is both sides accusing the scholars the other side relies on are looneys or mentally disabled. Anyways, I’m not an economics scholar. Et tu?
    ——–
    B: Economics scholar, no, business and financial translator for the past 20 years, yes.

    - A.

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