The long and short of it (Noah Smith)

Gerald Curtis’s article in the Financial Times deserves a response from me as well. The short version of my response is that I agree with Tobias: the fact that the DPJ will not be able to avert a depression is not sufficient reason to write them off.

The longer version is this: Curtis is right when he says that “whatever the political goings-on, there is no optimistic short-term scenario for Japan.” But he is wrong to blame that fact on Japan’s current political mess. With international demand collapsing and public debt at well over 100% of GDP, Japan’s government is essentially unarmed. Were Japan led by a triumvirate of FDR, the Meiji emperor, and Yoda, there would still be next to nothing the government could do to stave off a steep drop in exports, and thus investment, and thus GDP.

This does not mean, however, government action is unimportant. Keynes may have said that “In the long run, we are all dead,” but we should be thankful that leaders in his day did not take that to heart. I may be a short-run pessimist on Japan, but I’m a long-run optimist and a medium-run agnostic. In the medium and long run, government will be the key to Japan’s performance.

What can be done to boost Japan’s performance three or four years from now? By my count, at least two big things. The first is free trade. As soon as worldwide demand begins to recover, Japan could get the jump on rivals like South Korea and Taiwan by signing real — not cosmetic — free trade agreements with Asia, Europe, and the US. And a lowering of food prices would instantly boost Japan’s real per-capita GDP without Toyota having to sell one more Prius.

The second is to get more women into the workforce – and fast. Ken Worsley notes that women, who make up half of the labor force in the West, comprise only 40% in Japan. This means that Japan’s labor force participation rate is much lower than America’s. Although not measured in the low official unemployment rate — stay-at-home women are more likely to say they “don’t want to work” than that they “can’t find a job” — Japanese women’s de facto status as a quiet economic underclass represents a huge loss in national output. A big push by METI to encourage companies to hire more women, coupled with an expansion of day care, could work wonders when the depresion runs out of steam.

Will the DPJ do these things if it is elected? Your guess is as good as mine. But then there is the long run.

Economists believe that national crises — wars and depressions — represent opportunities in disguise, for it is only during these fluid times that nations can change their basic institutions. This is evident when we look at America in the Great Depression. FDR’s stimulus spending may or may not have made things better — the debate continues to this day — but few would deny the long-term importance of Social Security and the FDIC. Japan’s next group of leaders will be offered a similar chance.

The three institutions that must urgently need changing are, of course, the bureaucracy, corporate governance, and fiscal mechanisms. The DPJ proposes to shake up the cozy, stifling relationship that has turned all three of these institutions into pipelines for waste, pork, protection and inefficiency.

Imagine if this had been done a decade ago. If Japan had not thrown trillions upon trillions of yen at constuction companies, it might have the fiscal ammunition to fight today’s slump. If inefficient companies had not been sheltered from harm, Japan might not have built up the overcapacity that is making its current depression even deeper. Women would be working more and labor markets would be more flexible. Yet nothing was done, two decades passed, and, pace Keynes, most of us are still alive to face the consequences.

This is why I agree with Tobias. If the DPJ did nothing except reform Japan’s central institutions — if it utterly ignored the medium-term — that would still lead to an incalculable improvement ten or fifteen years down the road. To throw up one’s hands, as Gerald Curtis does, is to encourage a false sense of helplessness. Which, in a sense, is the only thing we have to fear.

– Noah Smith

One thought on “The long and short of it (Noah Smith)

  1. Anonymous

    Hello Noah and Tobias, this is a great blog. Gerald Curtis must be really frustrated by what has happened to Japan over the last two decades. He loves Japan and the Japanese people very much. He saw Japan at its absolute best, when it achieved double digit economic growth year after year in the 1960s. He is, in effect, a child of the glorious mid-Showa Period. How bitter it must be for him, in the twilight of his career, to watch Japan stumble and bumble year after year.For me, one of the most telling sentences in the FT article by Curtis stated that Japan sent its economy into overdrive during the Bubble Era in an attempt to \”overtake the West.\” This is troubling. Japan has now failed to \”overtake the West\” by either military means (in the 1940s) or by economic means (in the 1980s). Let\’s hope that when Japan finally recovers from its malaise, it won\’t try yet again to overtake the West. Such a goal strikes me as irrational, futile, and having no bearing on the actual welfare of the Japanese people. I suppose it may be occasionally necessary to remind the Japanese establishment that the British Empire is gone and the Meiji Period is over. There is no need to overtake the West.

    Like

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