"Excess Capacity Slowing Japan's Recovery"
Sandra Sugawara
Washington Post, December 25, 1998, page B9
This article discusses the prospects for Japan's economy over the next several years. The article repeatedly criticizes Japan's economic system because it is committed to preserving jobs and preventing corporate bankruptcies. For example, the article notes the recent spate of mergers in the United States and Europe, which have been accompanied by announcements of large-scale layoffs, and then comments: "But Japanese executives and government leaders remain paralyzed, in part because their economic system is designed to preserve jobs and prevent corporate bankruptcies." It is not obvious that these are the wrong goals for economic policy.
While the article asserts that the merger wave is an effort to reduce costs to maintain competitiveness, it is worth noting that the U.S. is currently running an annual trade deficit of close to $200 billion, or more than 2.0 percent of GDP. By contrast, Japan is running a trade surplus that is more than 2.5 percent of its GDP. By this measure, it would appear that it is the U.S. economy that lacks competitiveness.
After describing the depth of the current recession, the article asserts: "The nation has two choices. The first, the course advocated by many international economists, is to close unneeded factories, allow inefficient companies to go bankrupt, deregulate the economy, and hope that out of the ashes of this collapse will spring new business." This is exactly the course that the I.M.F. and other western economic advisors recommended for Russia, after the dismantling of the Soviet Union. As a result of this policy, its economy has shrunk by close to 50.0 percent. (See "What on Earth?: Hardships in Russia," Washington Post, November 14, 1998, page A16. ) Its economy is continuing to contract further producing wide-scale poverty and hunger. Given the track record of this sort of policy in Russia and elsewhere, it should not be surprising that Japan's government is not anxious to induce an economic collapse, and to "hope that out of the ashes...will spring new business."
The second option is presenting as spending more public money to stimulate the economy and to "hope that robust global growth will revive Japan's export machine." The article asserts that "the Japanese government has pursued this strategy for eight years, and yet the economy continues to weaken." It furthermore warns that Japan cannot continue to stimulate the economy with public funds for much longer, because government debt is now "exceeding the nation's gross domestic product."
These claims are not accurate. The government has not adopted a consistent policy of applying fiscal stimulus to the economy through deficit spending. It has appropriated significant sums of money for public works programs, but this money has often not been spent. Also, Japan reversed this policy of fiscal stimulus by imposing a two percentage point increase in its national sales tax in the spring of 1997, just as its economy was beginning to show signs of stronger growth. Virtually all economists see this tax hike as a major cause of the current contraction.
It also is not accurate to claim that Japan's debt exceeds its gross domestic product. By Japan's accounting method this is true, but that is because the government includes its Social Security obligations to future retirees as part of its debt. According to the most recent projections from the OECD, which apply a standardized methodology similar to that used by the U.S. government, Japan's debt to GDP ratio will be just 26.9 percent at the end of 1998, the lowest ratio for any industrialized nation. The annual interest burden on this debt is also quite low, just 1.0 percent of GDP. This compares to an interest burden in the U.S. that is equal to 1.6 percent of GDP and was as high as 2.2 percent of GDP as recently as 1992. These numbers suggest that Japan can use fiscal stimulus for the indefinite future without worrying about any financing constraints.
It is also worth noting that the interest rate on 10-year Japanese government bonds is just 1.75 percent, more than 3.0 percentage points below the interest rate that the U.S. government must pay on its 10-year bonds. This difference in interest rates suggests that financial markets view the Japanese government as extremely secure and therefore are willing to lend it money at a very low interest rate.
There are other paths out of Japan's current slump that are not discussed in the article. For example, M.I.T. economist Paul Krugman has argued that the best policy for Japan would be to have a sustained period of moderate inflation. (See Paul Krugman, "Japan's Trap," May 1998.) He argues that Japan's biggest problem right now is simply a lack of demand. With consumers fearful about losing their jobs, they are reluctant to spend money. Similarly, with little growth appearing on the horizon, firms see little reason to undertake new investment. However, if Japan were to have an inflation target of 3.0 percent annually, compared to its current level of near zero, it would provide considerable incentive to spend rather than save. Money that is saved would be losing value at the rate of 3.0 percent and the real interest rate (the nominal interest rate minus the inflation rate) would actually be negative. This means that people would effectively be paid to spend money now.
This sort of inflation policy should provide the necessary stimulus to get Japan out of its current economic slump; while it would not provide the sort of restructuring advocated in this article, it is not clear that such restructuring is needed. Japan's economy produced 4.9 percent per capita GDP growth over the 34 year period from 1960 to 1994. This growth rate quickly transformed Japan from a relatively poor, war-shattered country into one of the world's richest nations. It accomplished this transformation with the sort of paternalistic economic system viewed so harshly in this article.
There is no major economy that has been able to sustain a growth rate of even half this rate by applying the free market model advocated by this article. Given the track record of Japan's economy over a very long period, it may seem presumptuous to insist that it discard the system that has brought its people prosperity and security.
This article discusses the attitudes of investment banks towards the market that will be opened up by the creation of the common European currency. At one point the article discusses the prospects for the growth of private pension funds in Europe. It then comments about Europe's public social security systems, "continental pensions are a ticking time bomb."
The article does not indicate how it has made this determination. The public pension systems across Europe enjoy enormous public support. The populations of these countries have shown a willingness to pay higher taxes in order to cover the cost of longer periods of retirement as life expectancies increase. Since productivity growth in Europe has averaged close to 2.0 percent annually (as compared to just over 1.0 percent in the United States), European workers would be able to enjoy far higher living standards in the future than they do at present, even if taxes were raised to support a larger relative population of retirees.
"European Currencies Join As One"
Anne Swardson
Washington Post, December 25, 1998
These articles discuss some of the implications of the creation of the new European currency. The Times article notes the rules imposed on nations for joining the currency and comments, "the 11 euro nations for the first time have adopted a common economic policy that has reined in public spending, reduced debt and tamed inflation."
It is worth noting that this common policy has also led to a dramatic rise in unemployment among the euro nations, pushing the unemployment rate in Germany above 11.0 percent and the rate in France to more than 12.0 percent. Later, the Times article comments that while pressure for cost-cutting created by the euro "may contribute to Europe's high unemployment, it may also initiate much needed changes in costly regulations that hinder competitiveness today." The Post article similarly asserts that "the euro is intended to force the nations of Euroland ... to do what few have the political will to do alone: make their economies more efficient and competitive, even at the price of job losses on a continent already facing double digit unemployment."
Neither article indicates how it has been determined that Europe needs to make the changes they advocate. While the United States has a trade deficit that is equal to approximately 2.0 percent of its GDP, the euro countries have a trade surplus of the same magnitude. While productivity growth has averaged close to 1.0 percent annually in the United States over the as two decades, it has averaged close to 2.0 percent in the euro countries. By these standard economic measures of competitiveness, the euro countries do not have any obvious need of reform.
The Times article concludes with a comment from an official of the German central bank: "Countries have to realize that the misbehaviors of one country can damage all others. If a big country runs a high deficit, it is pretty clear the European Central Bank will have to react with a rate increase." Given the high level of unemployment across Europe and the almost complete absence of inflation, it is not clear why the European Central Bank would feel any need to raise interest rates if any European country were to run a large budget deficit at present.
However, it is true that the misbehavior of one country damages others. Contractionary fiscal and monetary policies pursued one nation reduce its imports from other nations, thereby lowering demand and employment in neighboring nations. In this way, the high interest rates in large nations like Germany had the effect of raising unemployment not just in Germany, but in all other European countries as well. This sort of misbehavior has had much larger negative consequences for the people of Europe then have the high budget deficits warned about in the article.
The Post article notes that the euro was "conceived, designed, and refined by government leaders and EU bureaucrats. But the people of Europe are catching up." The article then refers to people of southern Europe, who it says "have become enthusiastic supporters as their governments cut spending and wrung inflation out of their economies." A better example of people catching up to what their leaders are doing might be in northern Europe, where voters in France and Germany tossed out governments that attempted to cut benefits to meet the requirements for joining the euro. The populations of these countries clearly place a higher value on maintaining their social welfare systems than the sort of efficiency advocated in these articles.
This article discusses the context in which the Clinton Administration is putting together the budget for the year 2000. It notes how the budget rules set up Congress have placed serious constraints on funding for new programs, even though the budget has a substantial surplus. It notes interest in removing the caps and then comments that the caps have provided "reassurance to Wall Street, which remains wary of the Federal Government's penchant for living beyond its means."
The fiscal history of the last half century indicates that the Federal Government does not have a penchant for living beyond its means. Except for the years of the Reagan and Bush administrations, the federal debt has consistently fallen relative to the size of the economy, except when the economy was in a recession, dropping from 108.5 percent of GDP in 1946 to 25.7 percent of GDP in 1979. It rose to 50.2 percent of GDP in 1993 as a result of Reagan-Bush era deficits, but it has since fallen back to 43.8 percent of GDP, the second lowest debt to GDP ratio for any major industrialized country (following Japan).
This article reports on efforts to deal with the computer problems that will result from the change in the century next year. The article asserts that "industry analysts predict the total worldwide bill for making date related repairs will come in between $300 billion and $600 billion. If litigation over who should pay and insurance costs are added to the mix, the estimates jump to more than $1 trillion." It is worth putting these estimates in the context of other economic problems. If the costs are assumed to be spread roughly equally over three years (1998, 1999, 2000), then these estimates imply a range of between $100 and $330 billion annually. If the costs to the United States are one third of worldwide costs, then this would imply annual costs to the U.S. of between $33 and $110 billion annually.
By comparison, if the government were to resolve the projected shortfall in the Social Security program entirely through an immediate tax increase, the cost would average $71.2 billion annually over this three year period. This sum is almost exactly in the middle of the estimated range for the cost of fixing the year 2000 problem.
In other words, the potential burden facing the nation as a result of the increasing costs of the Social Security program is approximately the same as the costs associated with fixing the year 2000 problem. It is interesting to note that the former problem has become a national preoccupation, while the latter has received limited and sporadic attention.
This article presents an analysis of the impact of a 1996 law requiring insurers to treat mental health problems in the same way as physical problems. It points out ways in which insurers have largely managed to evade the intent of the law.
Dean Baker is a senior research fellow at the Preamble Center.
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