Newsweek September 2009
Remember the fable of the hard-working ant and the irresponsible fun-loving grasshopper? As generations of parents tell their children, both creatures get what they deserve. The grasshopper pays a terrible price for his summer of fun, while the ant survives the winter snug and smug.
Still, as parents also tell their kids, whoever said life is fair? The lesson of the past year is that the global economy does not operate like Aesop’s morality tales. The US and other grasshopper economies may be hurting, but the high-saving ant economies are comatose in the intensive care unit. The OECD expects the US to contract by 2.8% this year and the UK by 4.3%. A shocking performance – until you compare with Japan which is expected to shrink by 6.8% this year and Germany which is expected to shrink by 6.1%.
What happened? In simple terms, if US consumers stop going to the mall, Japanese and German factory workers stop going to work. Current account imbalances have been an ever-present feature of the global economy since the early 1980s, growing to eye-popping proportions this century. But it takes two sides to make an imbalance. The grasshopper economies have been living beyond their means – persistently consuming more than they could produce. Meanwhile the ants have been living below their means – producing more than they could consume.
So far the adjustment has been less wrenching for the grasshoppers. They must consume less and invest more, which can be accomplished fairly quickly, as the sharp rise in US savings shows. The ants, on the other hand, must produce less – – triggering a brutal plunge in industrial output.
The damage has been way outside the experience of post-war recessions. Japan and Germany thought thought they were being conservative , but in fact they were taking a great deal of risk. Their entire national strategy is in need of re-assessment.
This is both more urgent and more feasible for Japan. Germany is locked into the euro – which removes discretion over monetary, fiscal and currency policy, but provides an economic buffer zone. Japan, without an economic bloc to constrain and support it, can set policy to match its goals.
What should those goals be? Firstly, secondly, and lastly strengthening the domestic economy. Japan is a rich country, with a relatively small exposure to exports – equivalent to 15% of GDP, versus 35% for the UK and 30% for France. Yet such is the feebleness of domestic demand that this last cycle was more than ever before dependent on exports and export-related business investment. Nominal wages are no higher now than in 1992, and households have been ravaged by the post-1990 decline of 70% in housing prices.
For much of this century the problems were masked by the political dominance of Junichiro Koizumi, Japan’s equivalent of Tony Blair. Koizumi’s exceptional charisma enabled ed him to sell a program that combined Thatcher-Reagan supply-side reforms with fiscal austerity and the weak yen favoured by financial bureaucrats and big business.
Many of Koizumi’s reforms were useful, but the effect on average wage earners was to make their tax and social security burden higher, their jobs less secure, and their yen savings worth less than Japan’s true competitiveness merited.
Now Koizumi’s Liberal Democratic Party is in seemingly irreversible decline, having been totally blindsided by the economic crisis. The leaders of the opposition Democatic Party of Japan suffer from a serious charisma deficit, but they appear to understand some of the deeper issues. Their plan to introduce generous French-style child benefits of Yen 26,000 per child per month aimed at boosting the fertility rate. It might work, as it did in France, which now has the highest fertility rate in Europe. It might even lead to other good things, as Japan’s miserable demographic profile casts a pall on the long-term outlook for housing prices and general economic confidence.
The key point is that the DPJ’s program marks a break with the priorites of the past ten years. It needs to go further. The next administration must bring the Bank of Japan on board, set an inflation target, and turn on the monetary spigots Bernanke-style. It must emphasize what government bond yields under 2% have been signalling for years – that the public deficit is not a problem since it is comfortably covered by private sector savings. It must shift the tax burden to companies from households, the main victims of the fiscal squeeze, and tackle economic insecurity by providing a credible safety net.
Can Japan finally emerge from its post-bubble doldrums? The truth is so far it has never really tried. But if the shock of the crisis forces the Japanese ant to learn a few grasshoper songs, it would be good for ordinary Japanese, good for the Asian balance of power and good for the world.