Tuesday, September 29, 2009

Will the DPJ weather the global rebalancing?

David Brooks's latest column in the New York Times calls for a restoration of "economic values" in the United States, with the aim of making "the U.S. again a producer economy, not a consumer economy." Brooks sees a decline in traditional values of restraint behind the rise of consumer spending to ever greater portions of GDP and the growing indebtedness of consumers. Whether or not the emergence of the US as a consumer economy is a function of declining values, greater restraint by US consumers is the flip side of Japanese consumers spending more of hoarded savings. After all, the growth of the US consumer economy was accompanied by global imbalances, massive current account surpluses by countries like Japan.

The question now is how to execute the transition to a more balanced relationship among the world's economies, including and especially in the relationship between the US and Japan. How can the US become relatively more predisposed to production and Japan relatively more predisposed to consumption (especially of imports from the US and elsewhere)? The FT's Wolfgang Münchau praises the G20 for at least recognizing the problem of imbalances. For his part Münchau rejects the notion that adjustment can happen automatically simply by US households changing their behavior — or rather, that it can happen, but the transition will be painful everywhere, as Japanese exporters, deprived of American consumption, have discovered over the past year. Instead he argues that each country will have to adjust in its own way:
The answer is that policy will have to be tailor-made to suit the specific circumstances of each country. China will probably not be able to reduce its excessive current account surplus without a revaluation of the renminbi. In Germany, the best overall macro-policy instrument would be a big tax cut to boost domestic demand. In the UK, restoration of balance will have to include heavy cuts in public spending, while Spain will also have to raise taxes, even in addition to last week's announcement of a rise in value-added tax.
And what of Japan?

The DPJ fully acknowledged during the campaign that the challenge facing the government is managing the transition from the postwar producer economy — divided between efficient exporters and inefficient domestic producers and service providers — to a more consumer-centered economy.

But less clear is how the Hatoyama government plans to contribute to the global rebalancing. After all, the government has few policy tools at its disposal. Interest rates cannot go any lower. The government's debt burden limits its ability to use public funds to make up for weak private consumption. The yen's exchange rate is one tool available to the government, but as Finance Minister Fujii Hirohisa's conflicting remarks suggest, there are political limits to how far the government can permit an undervalued yen to rise. After stating following a summit with US Treasury Secretary Timothy Geithner on the sidelines of the G20 summit in Pittsburgh last week that the government would not intervene to keep the yen down, Fujii subsequently softened his position, alluding to intervention should the dollar-yen exchange rate rise too rapidly.

Richard Posner's note upon reading John Maynard Keynes's General Theory of Employment, Interest, and Money for the first time — "How I Became a Keynesian" — makes for interesting reading in light of Japan's dilemma. Posner highlights Keynes's focus on consumption as the engine of growth in an economy — and how uncertainty can trigger hoarding. "People do not save just to be able to make a specific future expenditure; they may also be hedging against uncertainty," writes Posner. "And the third claim, related to the second, is that uncertainty — in the sense of a risk that, unlike the risk of losing at roulette, cannot be calculated — is a pervasive feature of the economic environment, particularly with respect to projects intended to satisfy future consumption." This passage strikes me as a particularly succinct description of the problem faced by the Japanese government since the bubble burst: how can the government dispel the ubiquitous sense of uncertainty on the part of Japan's aging consumers? LDP governments engaged in policies that took the outward form of Keynesianism — large-scale construction projects — without appreciating the essence of Keynes, that the goal ultimately was (and is) getting consumers secure enough to spend their own money again. For all the dams and bridges built by the government, the money probably would have been better spent rebuilding the social safety net, which would have in turn made the economy better capable of weathering the transition from the producer-centered dual economy.

In short, the DPJ-led government will attempt what should have been done a decade ago, except that now its fiscal policy options are constrained and the global economy is recovering from a monumental crisis. It will have less recourse to foreign demand to ease the pain of transition than the LDP had up until the global financial crisis. Ultimately the DPJ may be able to do little more than make the transformation marginally less painful, but, as Noah Smith wrote at this blog earlier this year, it will be painful nevertheless. The DPJ may be able to extend its time in office if it is able to deliver adequate social spending in its budgets, but admittedly the prospects for success are grim. The government may simply not have the tools at its disposal to overcome the thriftiness of the Japanese people in an age of uncertainty — but it could pay the political price for "inaction" anyway.

5 comments:

Anonymous said...

"Whether or not the emergence of the US as a consumer economy is a function of declining values, greater restraint by US consumers is the flip side of Japanese consumers spending more of hoarded savings."

If possible it would be useful if you could flesh this thought about a bit more. In what sense do Japanese "horde" the cash. The money is saved an banks, and the banks then can lend out the money, right?

Then the money can be used towards future investment or investing in government bonds or whatever? So how is this hoarding?

For example, currently lots of Japanese put their money in postal savings accounts. A lot of this money is then put into government bonds. This has enabled the government to borrow a great deal of money. Is this a form of hoarding? Even you seem to suggest that had the government only used the money wisely, this would have been to great benefit. So here "hoarding" would then be good? (Aren't you tending towards making two divergent claims here.)

Moreover, in a figurative sense only, what is the future claim that the government has on all this savings? How much of this savings has already been spent by the government? (Again in a figurative sense.)

As far as Posner, you might be interested in Don Bourdreaux response posted here:
http://cafehayek.com/2009/09/on-posner-the-keynesian.html

bolly said...

love your blog. Really great. Thanks for all your hard work. It is appreciated!


I have no expertise in economics so this is really the ramblings of a novice but as a 15 year resident of Japan I feel my experience and observations are worth note. The following are just a few thoughts running through my mind--

The aging population presents serious issues with regard to consumption. What do older people buy? How are they spending money? Are the buying houses and durable goods? Cars? Electronics? Cell phones?

I dont think they are. Most of the older people I know own their homes, or are finishing off their loans. New home appliances are kept until they break. Cars are being kept longer and longer (one person told me she bought a BMW because she wanted a durable car and it would be the last car she ever bought) and the older people i know have a hard enough time figuring out their current cell phone to venture into another purchase.

Therefore, IMHO an aging Japan is a Japan that is actually consuming less (if all things stay as they are).

So what are they consuming?

In my experience they are consuming--health care, food, travel and some services. (Services--BTW are an area where I think more of the aging population will spend money--clean the house, cook the food, drive me to the store, etc..)

So IMHO Japan is reaching a cycle of diminishing returns ---Pension money is flowing to the older generations but not being returned to the society through their consumption.

One proposal (and i think this is going to be inevitable) is to raise the consumption tax.

This will have a twofold effect--spur massive consumption before the tax takes effect, and later pull more of that pension money back into the system. (which at 5% is just too low)

Again just some random thoughts and anecdotes.

Keep up the great work!

Noah said...

A couple points:

1. The debt burden and sluggish growth both also hold the yen down. The BOJ is forced to keep interest rates near 0 essentially permanently, to avoid a debt crisis and fight persistent deflation. That makes the yen naturally weak.

2. In terms of global imbalances, Japan isn't really contributing that much as of right now. The current-account surplus is much smaller than before the global crisis, and the savings rate is down around OECD norms.

3. But, of course, Japan's economy would still benefit from a sustained rise in personal consumption, were this possible to achieve. Don't hold your breath, folks...

Richard Green said...

It seems a fairly obvious and straightforward point that the existence of a welfare state (particularly unemployment benefits) reducing uncertainty and hence the paradox of thrift. I really don't know why it doesn't get made more often. I know I was making it in essays throughout university. The fact that it'll have even longer term benefits as automatic stabilisers is a bonus. That and the fact that obtaining unemployment benefits is such a inhuman and Kafkaesque that any improvement would be considered morally just even by most conservatives in the modern world. What other country would withdraw benefits because of inadequate misery in your personal life?

I hope that the point will be appreciated more often now that the Kalecki-Keynes insights are being re-established without the disfiguring fascade of neo-keynesianism or new keynesianism that was built in front of them.

Tobias Harris said...

Anonymous,

A lot of Japanese households keep money in cash instead of in banks, which is literally hoarding.