Letter bombs (14): Into the unknown
Posted by ampontan on Monday, January 17, 2011
NOBEL LAUREATE Friedrich Hayek once wrote, “The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.”
The first American to win the Nobel Prize in economics, Paul Samuelson, wrote during an economic crisis in the 1980s:
“What we know about the global financial crisis is that we don’t know very much…It would be reassuring and dramatic to declare that (officials in charge of economic matters) had succeeded. But the duller truth is that we don’t know — and neither do they.”
Finally, testifying before a congressional committee in the U.S. last year, George Mason University economist Russell Roberts said about the stimulus:
“There is no reliable way of knowing whether the stimulus package has averted a worse situation — or whether it’s part of the problem. There is no consensus in the economics profession on this question, and no empirical evidence that can settle the dispute.”
That should set the table for two articles that reader Marellus sent in, the conclusions of which couldn’t be more different.
The first is by Mike “Mish” Shedlock, who has a website called Mish’s Global Economic Trend Analysis. Mish riffs off of former Chief Cabinet Secretary Sengoku Yoshito’s statement earlier this month that the Japanese economy was “approaching the edge of a cliff”.
“The…statement “Japan is approaching the edge of a cliff” is a sure sign Japan has already fallen off a cliff. Politicians do not admit problems until it is too late to fix them. Thus, we have official admission that Japan’s demographic time bomb has just gone off. The only question now is how quickly the problem escalates.”
His argument is compelling, though he misses a golden opportunity here:
“Raising taxes in the midst of deflation hardly seems right, but the alternative is default or further escalation of government debt.”
There’s no mention anywhere of the alternative of either cutting government spending or not exacerbating the existing debt, which neither Democratic Party government in Japan has chosen to do. Indeed, the Hatoyama budget was the highest in Japanese history, and the initial proposals for the Kan budget for FY 2011 are slightly higher. They have added the enormous burden of child allowance payments, to cite one example, and failed to keep the fanciful promises they made for funding them when in opposition. Of course they knew the promises were counterfeit when they made them, but the idea of standing on the edge of the economic cliff didn’t bother them then.
Mr. Shedlock is properly scornful of the “government buffoons” and their Keynesian schemes, but overlooks that the current government, in its domestic policies, is just as far to the left as the Obama administration during its first two years in office, and for the same reasons. He also seems to be unaware that in Japan, fingers also point to the Finance Ministry and its enormous power to control policy. (To be fair, few people outside of Japan talk about it.) Higher taxes and a growing government are just dandy with them; it funnels even more power and control in their direction, as we’ve often pointed out here.
Curiously, John Butler writing for The Amphora Report looks at several of the same phenomena but sees something else entirely. He writes:
(T)his brings us to the most important point of all, which is to compare the entire Japanese economy, public and private, to those of the West. As a legacy of decades of large trade and current-account surpluses with the rest of the world, Japan has a cumulative net foreign credit position of some 57% of GDP, whereas the US and UK have net foreign debt positions of around 19% and 22%, respectively, with the euro-area roughly in balance. This is reflected in part in Japan’s large official foreign exchange reserves of just over $1tn, the bulk of which are held in the form of US Treasury securities. (The US and UK have essentially no foreign exchange reserves. The euro-area has some $200bn.) Now, why are these figures so important? Think about it: If you are approaching retirement, do you want to owe other people money, or do you want them to owe you? Japan may be an ageing society but it is an ageing society with a private sector that has saved prudently for retirement! Japan may have a huge government debt but it can service that debt for an extended period by gradually winding down its massive net foreign credit position.
One objection that might be raised at this point is that perhaps, notwithstanding a large net foreign credit position, Japan’s private sector has nevertheless not saved enough to fully fund its demographic-driven future liabilities. Fair enough, in fact we would agree that it hasn’t. But please answer this: Who has?
We’d much rather be in line to receive a fully-funded Japanese pension–despite the demographics–than a ponzi-style pay-as-you-go and hope-the-stock-market-always-rises western-style one!
Alas, the Kan government is now talking about pension reform, and one possible “reform” they’re considering is implementing that same Western Ponzi scheme pension plan. Perhaps that’s what they mean by “putting people first”.
He also makes the point that Japan would benefit more than other countries by raising the retirement age, first, because the normal retirement age is 60, and second, Japanese tend to live longer and healtheir lives than people in the West.
“We do sympathise with the (fictional) Mr Mizuno of our narrative above. He is perfectly justified in having some serious concerns about the future of his country. But it is the now-retiring baby boomers of the West who, in our minds, have reason to be outright terrified.”
Both Mr. Shedlock and Mr. Gibson focus on Japan’s infrastructure investments, but neither mentions that one of the DPJ’s campaign slogans in 2009 was to call for a shift “from concrete to people”. That, combined with the DPJ’s unwillingness to privatize anything–they’re backed by public sector unions, after all–would tend to postpone any benefits Mr. Gibson sees by selling off some of the public infrastructure.
And, as is usual among Western observers, neither man mentions that the Koizumi and Abe administrations managed to whittle the annual budget deficits from JPY 20 trillion + when Mr. Koizumi took office to JPY seven trillion when Mr. Abe left office. It is almost double that first figure in the current fiscal year under Mr. Hatoyama’s budget.
Those looking for any improvement with the current government should keep in mind that Mr. Hatoyama had two Finance Ministers: The first was Fujii Hirohisa, the former head of the Finance Ministry’s Budget Bureau (i.e., the paymaster for Big Government), and Kan Naoto himself. Mr. Kan is now the prime minister and Mr. Fujii has just been brought back into the Cabinet as the Deputy Chief Cabinet Secretary.
If the Japanese economy is on the edge of the cliff, it is because the LDP successors to Messrs. Koizumi and Abe reversed course, and the DPJ government decided it would be just tickety-boo to walk right up to the edge and see how far they could lean over.
Who has a better grasp of the real situation, Mr. Shedlock or Mr. Gibson?
The professors Samuelson, Hayek, and Roberts had the first word in this post, and it’s just as fitting to give them the last.