Tuesday, August 27, 2013

"Japan's pump-primed recovery proves US deficit hawks wrong"

Dean Baker @ The Guardian:
Many of the people who ridicule efforts at using government spending to boost the economy and create jobs like to turn to Japan to warn countries from following that route. After all, Japan's budget deficit last year was more than 10% of GDP. That would be more than $1.6tn in the US economy today. Its gross debt is more than 245% of GDP. That would imply a debt of almost $40tn in the United States, which would mean a debt of $125,000 for every man, women, and child in the country.

Those are the sorts of numbers that policy types in Washington find really scary. Fortunately for the Japanese people, the folks currently running their economy are more interested in sound economic policy than pushing scare stories about debt and deficits. Rather than rushing to reduce the deficit, Japan's new prime minister, Shinzo Abe, went in the opposite direction. He deliberately increased spending to create jobs.

He also appointed a new head of Japan's central bank who is committed to raising the inflation rate. Japan has been suffering from near-zero inflation, or even deflation, since the collapse of its stock and housing bubbles in 1990. Abe's pick as head of the central bank has committed the bank to raising the inflation rate to 2%. Implicit in this commitment is the notion that the bank will buy up as many Japanese government bonds as needed to reach its inflation target.

In other words, the bank is prepared to print lots of money.

While we are still in the early days of Abe's program (he just took office at the end of 2012), the preliminary signs are positive. The economy grew at a 2.4% annual rate in the second quarter, after growing at a 3.6% rate in the first quarter. By comparison, GDP in the United States grew at an average rate of just 1.4% in these two quarters.

The difference is even larger than these numbers imply, since the population in the United States is growing at a 0.7% annual rate, while Japan's population is shrinking at a 0.1% rate. This means that on a per capita basis, the US economy grew at just a 0.7% annual rate through the first half of this year, while Japan's economy grew at a 3.1% annual rate.

To put this in dollar and cents terms, if per capita growth in the United States had been the same as in Japan over the first half of 2013, people in the United States would each be $600 richer now. That would translate into $2,400 in additional income for a family of four.

This additional growth shows up in other measures as well. The employment to population ratio, the percentage of adults who are working, increased by 0.6 percentage points in Japan between the last quarter of 2012 and the second quarter of 2013. By comparison, in the United States it rose by just 0.1 percentage point. The 0.5 percentage point difference would translate into another 1.3m jobs in the United States – not bad for six months work.

At this point, America's deficit hawks are jumping up and down screaming that the boost to Japan's economy is just a "sugar high", and that it will soon face a horrible collapse as payback. Of course, anything can happen in the future, but we just don't see any real evidence of the deficit hawks' doom story as of yet.

If Japan's economy is about to burst under its huge debt load, the financial markets apparently aren't wise to the trick. The interest rate on ten-year Japanese treasury bonds is less than 0.8%. This means that investors are putting tens of trillions of yen on the line, betting that Japan's government and economy will not implode.

The low interest rates translate into to a low interest burden. Japan's net interest payments on its debt last year were under 0.9% of GDP. (The payments would be even lower if we deducted the money refunded from the central bank for interest it received on its bond holdings.) By comparison, in the United States, interest payments were over 1.0% last year; and in the bad old 1990s, interest payments exceeded 3.0% of GDP. Even if interest rates soared in Japan, this would be offset by a plunge in the market value of the country's debt.

In short, it is hard to tell a story about how Japan will suffer as a result of the measures its government is taking to boost growth and create jobs. These policies are 180 degrees at odds with the deficit fixation that dominates Washington policy debates. The deficit hawks have made enormous progress in reducing the government deficit over the last few years. The 2013 deficit, measured as a share of GDP, is less than 40% the size of the peak deficits in 2009 and 2010.

However, the sharp pace of deficit reduction has meant less growth, fewer jobs, and more unemployment. That might mean that millions of people won't have enough money to support themselves and properly care for their children. At least, the deficit hawks can have the satisfaction of knowing that in the United States, the deficit is under control. But just ask Japan about its "lost decades".

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