Reconsidering Japan… Reconsidering Paul Krugman
The New York Times is doing a series on Japan that it describes as an examination of "the effects on Japanese society of two decades of economic stagnation and declining prices." Reading the series is about as cheery a task as rubbernecking at a car wreck on I-95. But unfortunately the Times series simply repeats the "conventional wisdom" about Japan put out by the same economic experts who missed an $8 trillion housing bubble in the United States, and in fact have been wrong on most of the big economic issues over the past two decades.
Look at it this way: In the midst of the Great Recession, the United States is suffering through nearly 10% unemployment and 50 million people without health insurance. A new report has found over 14% of Americans living below the poverty line, including 20% of children and 23% of seniors, the highest since President Lyndon Johnson's War on Poverty. That's in addition to declining prospects for the middle class, and a general increase in economic insecurity.
How, then, should we regard a country that has 5% unemployment, healthcare for all its people, the lowest income inequality and is one of the world's leading exporters? This country also scores high on life expectancy, low on infant mortality, is at the top in literacy, and is low on crime, incarceration, homicides, mental illness and drug abuse. It also has a low rate of carbon emissions, doing its part to reduce global warming. In all these categories, this particular country beats both the U.S. and China by a country mile.
Doesn't that sound like a country from which Americans might learn a thing or two about how to get out of the mud hole in which we are stuck?
Not if that place is Japan. During and before the current economic crisis, few countries have been vilified as an economic basket case as much as the Land of the Rising Sun. Google "Japan and its economy" and you will get numerous hits about Japan's allegedly sclerotic economy, its zombie banks, its deflation and slow economic growth. This malaise has even been called "Japan syndrome", sounding like a disease to warn policymakers, as in "you don't want to end up like Japan."
No one has been more influential in defining this narrative than New York Times columnist and Nobel Prize-winning economist Paul Krugman. Throughout the 1990s, and still occasionally today, Krugman has skewered Japan's economy and leaders. In the late 1990s, Krugman wrote a series of gloom-and-doom articles, complete with equations, theories and titles like "Japan's Trap" and "Setting Sun", bluntly stating: "The state of Japan is a scandal, an outrage, a reproach. It is operating far below its productive capacity, simply because its consumers and investors do not spend enough."
Krugman was commenting on Japan's so-called "lost decade" of the 1990s, when the Japanese economy was considered sluggish and underperforming. But let's look at some of the Japanese metrics during that time. Throughout the 1990s the Japanese unemployment rate was -- ready for this? -- about three percent. Not 30, that's 3. About half the US unemployment rate at the time. During that allegedly "lost decade," the Japanese also had universal healthcare, less inequality, the highest life expectancy, and low rates of infant mortality, crime and incarceration. Americans should be so lucky as to experience a Japanese-style lost decade.
Reopening the case of Japan raises some important questions. How do economists such as Krugman decide what to value and prioritize, or what to measure? What is an economy for? To produce the prosperity, security and services that people need? Or to satisfy economists and their equations, theories and models? For too many economic Cassandras, if their spreadsheet columns don't add up, if the surplus nations don't balance the deficit nations and the supply doesn't meet the demand, then disaster surely awaits.
Krugman has gone on the attack again recently, this time in a debate over fiscal stimulus vs. deficit reduction as a strategy toward economic recovery. As a stimulus hawk, he has written that the Germans -- one of the few economic bright spots in a struggling global economy -- "seem to be getting their talking points from the collected speeches of Herbert Hoover." He is criticizing Germany for the same thing he criticizes Japan -- not spending or consuming enough to stimulate its economy.
But what exactly are the Germans or Japanese supposed to buy more of? Surely Krugman has visited both countries, and it's plainly evident that neither are lacking in any material goods or modern trinkets to speak of. Americans are the only ones who seem to think they need three refrigerators, four televisions and a car for everyone in the household. Too many economists have yet to figure out that it is this consumer-driven economic model that has crashed and burned.
Japan's economy has been and remains successful. So is Germany's. Unlike the trickle down U.S. economy, Japan and Germany have reached an economic steady state in which they don't need roaring growth rates to provide for their people, and here's why: they are better at sharing the wealth produced by their economies to foster a more broadly shared prosperity among their populaces.
But for the economic experts, apparently, it doesn't matter if people's needs are being met; what matters is whether their theories and equations balance. Similarly with the media like the New York Times, which has been getting it wrong for years - they also missed an $8 trillion housing bubble, as well as weapons of mass destruction in Iraq (prompting the Times to issue an unprecedented mea culpa to their readers). In the same way, the Times and the rest of the media have been missing the real story about what is occurring in Japan and Europe.
As a result, there is a common sense aspect to this that gets lost amid the rhetoric and the headlines. Two lessons of our times are that economic bubbles eventually burst, and that the environmental consequences of unbridled growth in this age of global warming are severe. The world needs to figure out how advanced economies can provide for their people without having roaring growth rates driven by asset bubbles. If consumer-driven growth was the order of the day in the post-World War II era, going forward it is going to be steady-state economic growth -- growing not too fast, but not too slowly -- and learning to do more with less. Yet stimulus hawks like Krugman don't seem to get this; they want to crank the "growth machine" into full gear with huge government stimulus spending.
But the real game is no longer strictly about economic growth, it's also about sustainability. The era of U.S.-style trickle-down economies is over for wealthy countries because trickle-down is neither economically sound nor ecologically sustainable. The developed nations must lead the way towards a different path of development. This is not an easy challenge, yet it is the course that Japan and Germany have chosen. If the U.S. didn't have such a trickle-down economy that has produced so much inequality -- if it was, in fact, better at sharing its wealth -- perhaps it wouldn't need so much fiscal stimulus and growth
At the recent G-20 meeting in Seoul, South Korea, German Chancellor Angela Merkel rebuffed President Barack Obama and Secretary of the Treasury Timothy Geithner's appeals to go back to the toxic economics of Wall Street capitalism. Said Merkel, "It is essential to return to a sustainable growth path." One cause of the crisis was that "we did not have sustainable growth. In many countries growth was built on debt and [speculative] bubbles."
Her finance minister, Wolfgang Schäuble, was even more blunt. He described American policy as "clueless" and said the American growth model is stuck in a deep crisis. "The USA lived off credit for too long, inflated its financial sector massively and neglected its industrial base." Catch the irony: Germany -- previously sneered at by U.S. pundits for its "weak and sclerotic" economy -- is lecturing America about how to grow our economy. Given Germany's 6.7% unemployment (compared to 9.6% in the US) and an impressive record at manufacturing things that the rest of the world wants to buy, the Obama administration as well as Paul Krugman should be listening attentively.