Lost decades

But we have not yet seen any OWS movement in Japan. Japanese youth, under the strict social hierarchy and conformist education system think that their day will also come in the future when the younger generation will work hard to pay into their own retirement. I live in Japan on and off for many years and the nation in general is oblivious to the population decrease. On paper, it may be clear but in everyday life it's not something one can feel. The population will continue to decrease until the country reach a breaking point, a crisis so big that finally wake them up. But if my understanding of the Japanese youth is correct, there will still be no OWS on the street, they'll be staying in their own rooms, play computer games and watch porno DVD.

As I remember the events in Japan, the biggest issues related to the societal inability to deal with failure. This expressed as a giant credit overhang that affected many sectors. A typical problem was a bank lent to a company that couldn't pay so the bank lent more money which they partially took back as income. (A similar practice occurred in US banks that failed in the 80's.) The banks couldn't write down loans. There was a dramatic slowdown in the amount of money available for business. Similar things happened across the economy, so real estate prices stayed higher than could be afforded, etc.

This isn't the same as the US; the US credit overhang is mostly related to real estate and companies can go out of business. Japan then also had a weird financial system with banks limited to short term credit or long term credit - with only a few long term banks - and securities houses limited strictly to specific fields.

At the same time, the employment system was changing; companies first tried to find some work, even make-work for employees but that couldn't hold up. The bigger companies pushed unemployment out through their supplier groups, etc.

It's easy to say "punish the old" but the other approach is "punish the young" and the young are more resilient, have a longer future to do something with, and have more options in many ways - including health - than the old. I'm rather startled by the ease with which Economist writers have adopted the idea that we should take out economic loss on the old. It smells like the foul kind of utilitarian, the kind that justifies cruelty in the name of the long term and efficiency. Or that kind of idiocy that says we need to break eggs to make an omelet as though people are merely ingredients.

If people keep living longer lives, and healthier .. then it is quite reasonable that they would work to an older age than did people in the past. But our society and economy will need to adapt, as people will have to probably do different work when they get older. The career job that ends at retirement is anyway practically out of existence. We just need to realise that, and encourage people to start a new career, even when they are already quite old. The economy hasn't been very good at providing meaningful work for older people for a long time now. That needs to be changed.

On the other hand: America showed us the solution to the world's need to stop population growth. We can allow people to immigrate, and Europe has started letting in quite a flow of people. We are having problems coping with it, but we are developing somewhat of a melting pot. Japan should let in some more immigrant young blood.

In the longer run the countries that stopped their population growth first, and learned to live with a stable, or even somewhat declining population .. those countries will be the most future-proof.

I don't have jasiek w japonii's flair in economic analysis, but I don't need one to point out the fundamental flaw in the basic tenet of Market Fundamentalists: Money is everything in life.

This is plain wrong, and any trade or structural negotiations that demand us ordinary citizens in any country to behave in such a manner is simply wrong, if not sinful...

All Korean opponents of the US-Korea FTA, our own Japanese opponents of TPP, and the OWS demonstrators in US all agree on one thing; Money ISN'T everything.

Obviously just a theory, but I suspect an underlying cause of the crisis is the young, and young men in particular, deciding that society expects too much and offers too little in return. Private lending, government borrowing and benefits, family courts, child support agencies, company recruitment policies and so on have all been gradually ratcheting up the costs on young men and watering down the benefits they'll receive in return.

A young man today can look at the world and think: my employer wants to outsource me and cut my benefits, my girlfriend wants to marry, then divorce me and hit me up for half my assets plus child support, and the government wants me to foot the bill for all their social transfers. Why bother with it all? Might as well just play video games and drink beer.

You don't have to search far on the internet to find many young men in the West coming to this conclusion. Society has already cashed the checks on their future, not expecting that maybe the deal was becoming too unattractive to bother with.

Supplementing and summarising my previous post, it is the most favourable to revive the manufacturing sector at home, with the US marking a moderate current account deficit in a stable manner, by implementing geographical restructuring with reference to the dynamics of the marginal efficiency of capital, within the framework of moderately controlled international trade by tariffs and other means, with each economy understanding and respecting fixed factors of production of the other economies.

In my above view, let me reiterate that Japan’s demographic development has been taking much lesser role than the author thinks. Raising the age of retirement further than the apparently ‘socially’ consented like 65 is too weird and out of question. The idea is crooked! We should not adjust the retirement age to the economic conditions including flow of debt or institutional framework based on market-liberalism but adjust the economic conditions or institutional framework to a socially consented retirement age.

Japan’s lost decades came from adopting the idea that led to the former option, and not necessarily from its demographic development!

[2/2]

Secondly, with that model it is increasingly difficult to stabilise the current balance, because less capital equipment means less fixed factors of production (whether of goods or services). In my opinion, the US should realign its own market rate of interest (NB: not the key rates of interest such as the FF rate) to maintain a moderate level of current account deficit so that capital or income will be redistributed among the US and the rest of the world. That method is sustainable because the US dollar is the key currency, of which the value could be maintained by stronger US troops deploying all over the world. When the current balance is volatile, capital or income cannot be redistributed throughout the world in a sufficient manner that all the economies will accumulate capital. What is worse, some economies, especially China, has been regulating the exchange rate of the yuan to the dollar. Naturally, the current balance of the US economy cannot be stabilised, and thus capital is maldistributed in an extreme manner. It is, however, dangerous if China floats the yuan all of a sudden. At least, the yuan should be revaluated to the foreign currencies step by step and gradually so that it will be floated in the manner safe to the world in the future.

Thirdly, the successive US administrations have overlooked the quality or real side of capital as opposed the quantity or nominal side of capital. As the Cambridge capital controversy made clear, real capital is not measurable. However, just because real capital is not measurable doesn’t mean the dynamics of real capital doesn’t have effect on the dynamics of nominal variables, especially the marginal efficiency of capital which is decided by supply price of capital/asset and discounted present value of capital/asset thus by the dynamics of the two different long-term expectations. Hence, the question what sort of public investment would prop up the marginal efficiency of capital is not fully appropriate for mathematical analysis. It requires historical, sociological analysis. We are vaguely aware that the marginal efficiency of investment is higher for you when the geographical condition is favourable to you. For example, if you want to open a factory you think of how close to the customers, how close to resources of reasonable labour force, how easily, timely and steadily capital- and intermediate-goods necessary for your business are available (e.g. proximity to ports), how the local infrastructure is located, etc. You can make some indices to help you judge them, but there can be no index that explains the necessary information in a nutshell to you. That is partly about the non-measurability of real capital. If you want to stay at a place to run your factory whatever conditions may appear unfavourable to you, that is about your animal spirit. Thus, real capital is not measurable. At least, it appears reasonable that urban sprawl is negative to the marginal efficiency of capital. That is why I recommend geographical restructuring projects against urban sprawl.

Fourthly, while the idea of free trade is good in view of the merits from effective reallocation of rare resources and international division of labour, the idea is based on the logically precarious premise that free trade will induce interest rates and investment levels to be automatically realigned in a sufficient manner. That premise is of the efficient market hypothesis that is highly questionable, because you couldn’t remove various, tangible and intangible fixed factors of production that very between economies or societies. In my opinion, it is not whether free trade or protectionism that matters. For example, I don’t think that a customs union without fiscal union, whether or not it is attached with a monetary union, will work sufficiently to reallocate capital, scarce resources and labour in a manner favourable to the member economies of the customs union. The Trans-Pacific Partnership, which Mr Obama finds to be a miracle drug towards the presidential election, has this defect. I think that TPP will cause a disaster akin to the monetary and customs union in Europe. We’d better avoid any institutional changes to materialise such an extreme form of free-trade.

[end post]

[1/2]

First of all, we must form the consensus that the long stagnation is the norm for an economy that has accumulated capital to an extremely high level, because in that case the marginal efficiency of capital stays low at any point within the realistic range of volume of investment. This is a fate for an economy that has already become rich in capital.

However, statistics show that the very-long term growth trend of every economy – whether the United States, the United Kingdom, Germany, or Japan – is roughly between 2.5 and 3.5 per cent. For a rise in growth rate, therefore, a certain period of capital scarcity is required. That is a mild impoverishment or realignment in growth.

In case of the Japanese economy, the growth rate in the second half of the 20th century was extremely high. This trend was made in an autonomous manner at first due to the capital destruction in the previous period, which is the War, but later the trend came to be maintained in a heteronomous manner largely by the public investment projects, especially in the late 1970s that began from the Kakuei Tanaka administration. The problem with Tanaka’s policy was that it followed the American Keynesianism and thus focused on the quantity or nominal side of capital and overlooked the quality side or real side of capital. As a result, the economy became full of haphazard accumulations of capital that as a whole would yield insufficiently to let new capital investment outrun capital disinvestment and thus would not shift the marginal efficiency of capital upwards to a sufficient extent When the marginal efficiency of capital is low, a massive monetary ease leads to a financial bubble or a reckless increase in money held by speculative motives, because in that case entrepreneurs find holding money due to entrepreneurial motives (i.e. investment in a narrow sense) to be less lucrative than holding money due to speculative motives. In fact, the then successive administrations and the Bank of Japan adopted a policy to reduce the market rate of interest to cause a financial bubble or a forced increase in volume of the money supply increasingly due to money held by speculative motives. As Japan is an open economy, export helped prop up the marginal efficiency of capital, the effect of which became increasingly diminishing due to the globalisation since the end of the Cold War, in which the yen was increasingly popular so much that it was increasingly difficult for the economy to expand its export.

In my above view, Japan’s ageing population has been taking a much lesser role in its long stagnation than the liquidity preference has. My understanding is that the Japanese authorities in the past (and highly probably also present with the Democratic Party that follows the American mainstream economics in a more enthusiastic manner than the Liberal Democratic Party would in the past) adopted policies that would expand the liquidity preference but overlooked the relation between the market rate of interest and the marginal efficiency of capital, especially the marginal efficiency of capital or the quality or real side of capital.

The exactly same fallacy is found in the United States. Only is it that the US economy has been adopting the grand long-term policy of supply-side deregulation much more intensely than its Japanese counterpart has, such that its non-manufacturing sectors have been flourishing in the US economy more than Japan’s have and thus the marginal efficiency of capital has long been propped up thanks to long-term expectations on its non-manufacturing sectors.

There are, however, some big problems with this US model of economic development or Professor Solow’s model.

Firstly, the manufacturing sector has been increasingly destructed. Entrepreneurs in the sector find it decreasingly lucrative to invest money into their main enterprises (i.e. production of goods) at home. So, they invest into their main enterprises abroad instead and shut down factories and lay off workers at home. Large enterprises can invest abroad to keep their activities of production due to the credit expansion where actual interest rates are cheaper for larger enterprises so that they can easily raise money to restructure their businesses, but small- and medium-sized enterprises cannot do the same because actual interest rates are more expensive for smaller enterprises so they cannot easily raise money to restructure their businesses. Naturally, small manufacturers leave the market at home one by one. The same phenomenon has been taking place in Japan in a milder manner, but that is still a big problem with the present-day Japan.

[to be continued to 2/2]

Japan can eliminate all its government debt overnight with a two-word solution: Abolish Pensions.
Only realistic way this could be carried out is a Coup d'Etat, since new government then have no obligation to inherit the old government's political promises (That's what a pension is, after all)... It'll also drive down the value of Yen to about 200 to a dollar (if not make them inconvertible outright, that is...)

I’ve said before that I’d love to see the Occupy Wall Street movement focus their energy on generational wealth disparities. Right now they will be burdened, most of their working lives, with paying for someone else’s retirement.

And I've been burden paying off the retirement of the generation before me.

Why do you want to punish the ants and reward the grasshoppers?

I cannot help it if OWS people can't cut back on spending and save money.
http://research.stlouisfed.org/fred2/series/PSAVERT?cid=112

"This is what hipocracy looks like."

Regards

Great post, one of the more concerning aspects to the ongoing crisis in Europe is that the demographics of much of Europe will only get worse in the future.

It does not seem sustainable to expect the increasingly small cohorts of European young people to pay for the retirements of their elders.

This is particularly troublesome in a continent with free movement of labour. How long before young people across the troubled economies of Europe choose to leave their homelands for better opportunities abroad?

Could any one confirm, or provide evidence of how much pensions have been cut across Europe? I believe Ireland has instituted a 20% cut, but what about Italy and Spain?

Could any one give an estimate of the macroeconomic effects of revenue neutral cuts to old age welfare and progressive cuts to payroll taxes?

Is it reasonable to view the current budgetary problems in Europe as an example of Mill's tyranny of the majority, in which the retirees and older workers have extracted public spending and social protections at the expense of their children?

Is there any prospect that this political economic problem can be resolved?

Similarly to the previous poster, I would be very interested in Ryan Avent's thoughts on this.

This post allows me to ask a question I've posed at other blogs, which I'm hoping still to find good answers to:

Demographics I agree are among the most if not the most important factor in long range economic progress/regress. The entire world's population is expected to continue growing at a slower and slower pace, eventually actually stopping around 10 billion people in around 2050, and perhaps even declining from there.

Is the entire race eventually facing a situation like Japan's (and Europe's)? Can capitalism even function properly with that kind of demographic profile? For the next 40-50 years the young, populating, emerging world can be the 'growth engine' that makes the world's economy work. What happens when they too are done replacing themselves?

Modern capitalism has only been around for say 350-400 years, industrial capitalism for only 250 or so. Am I wrong to worry about something new having to evolve in 50 more years?

There is also a pretty clear demographic divide in the EU between central, Eastern and southern Europe, which have low fertility, and Northern and Western Europe which have fertility rates at least at replacement levels. This is a definite problem for Germany and Italy.

I got about half way through this post, and almost died of shock, because I assumed the author was RA. Now I'm looking forward to RA's response that it absolutely was a policy failure of the Japanese government in not sufficiently stimulating aggregate demand.

The Japanese bubble was absurdly bigger and the pop much worse than the recent unpleasantness.