You’d think that the steady disintegration of the world’s second largest economy would be a cause for comment. But because Japan’s problems are now longstanding, they are neglected like many running stories � they aren’t considered news.
Fortunately, Martin Wolf helps to set us straight. Martin provides a plausible solution to Japan’s lack of demand (plausible in the sense that, at a stretch, it might be adopted by policymakers).
The likelihood, however, is that the politicians and officials in Japan will continue to both dither and make wrong decisions, leading to an even worse economic crisis than they have now. That could at last set the stage for a healthy rebirth of the Japanese economy. It could, of course, also set the stage for a frightening, reactionary response in Japanese politics and society. I remain, though, an optimist against the evidence.
The issue that Martin doesn’t explore too deeply today (although he has done in previous columns) is raised in his second paragraph: “Japan’s experience in the decade since the end of its ‘bubble economy’ is an awful warning, one that the US Federal Reserve, struggling with a post-bubble economy of its own, has firmly in mind.”
Along with Martin, I don’t think the US will become another Japan, although there still seems to be considerable denial that it is suffering the hangover after the “benefits” of a bubble economy. But there remains a significant downside risk that consumer demand � the only thing keeping the US economy breathing right now � could evaporate, even with Fed rates down at 1% (which is where they are heading).
For a world where Japan is an economic non-starter at the moment, and Europe is moribund at best, a long period where the US engine remains in the sidings foretells tremendous economic woe ahead. And remember, I’m an optimist.
Lance, did you ever hear that story about how you can boil a frog? Is that what’s happening to people in Japan? It’s amazing how the slow progression of this deflation, to the point where the yen has appreciated 100% since 1992, hasn’t caused total uproar and revolution in the streets there.
I think it’s the slowness of the deflation, along with the generalized (but misplaced) guilt of the people in Japan for having it so good in the 1980s.
That’s part of it, Eric. But I think the relative passivity of the Japanese in the face of the last decade is both cultural and economic.
It’s cultural in the sense that the tendency is to trust the officials (the officials are seen as having largely created the Japanese post-war miracle); to avoid challenging the consensus; and, perhaps, some of the guilt you mention.
It’s economic because most Japanese are still prosperous, and certainly prosperous to an extent their parents in recent memory could not have imagined. The other crucial economic point is that one of Japan’s problems is that the pain in the economy has not been realised. Firms have not slashed investment and have not laid off large numbers of workers.
Contrast this with the US response, where firms are very, very quick to get out the axe. I think the quick US response results in a far more brutal downturn usually, but it gets the poison out of the system (and then the economy can correct to a benign state). The other cost and its one that neither Japan nor most European countries are willing to bear is a fracturing of the social compact and consensus. Workers are seen primarily as economic actors, and less as key constituents of a community.
Lance I’ve heard this here and there, I can’t help thinking that the destruction does not have to happen. I just don’t see how the evolution of free markets can survive these asteroid-like hits.
I appreciate your site and discussions Lance, I have a feeling we disagree about a lot of things so I will try not to muck up your board with totally contrarian views all the time, but I will be reading.
Best
Eric
Guys,
Japan’s problem, and now currently our problem, is that it hit a phase state barrier (the shift between machine automation to computer automation). In order to cross through to the next level, it will need to make fundamental changes in how its economy, government, and particularly its corporations operate. My belief is that it is going to take the US muddling through to a solution to point the way for Japan and other countries. Once we make it through the Japanese gov’t will be able to model against our solution.
Time to shift to a Moore’s law economy gentleman — the transition will be painful. It’s a peverse coincidence that the Asymmetric conflict we are in may help us make the transition more quickly by promoting a massive infusion of computer automation. This is very similar to the rapid industrialization and infusion of machine automation we went through to gear up for WW2, which pushed us through the last phase state change and out of the depression.
Sincerely,
John Robb
Hi John, don’t you assert that the Moore’s Law of Growth was already under way in the 90s? After this bust in tech, how are you going to convince people to get back in?
I think I argued this with you last time, that I believe the Fed (unintentionally) short-circuited the economy to (intentionally) kill the tech stock boom. What evidence can convince the US Fed to allow growth of this magnitude?
Whether you believe me or believe a more demand-side bubble theory, the effects of this recession will be to drive people away from investing in this area. Or the government will put up barriers to investment. Even if they use tech in their own lives, they will feel that it is marked for death for some reason. I’ve read this from people saying how bad an investment cable companies are, while they’re busy downloading over their cable modems.
Eric Mauro
Eric,
Moore’s law only impacted a subset of the nation’s economy (ie. the computer industry had 65% productivity growth – one of only 6 industry segments that actually grew productivity in the late 90’s). The computer industry hit a wall when it found the rest of the economy was too resistant to innovation to continue to absorb their products.
While the Fed has some control, I don’t buy-in to the idea that they know what they are doing under these circumstances. The Fed and financial management is only useful when managing short term economic cycles. They had little to no control in the 1930’s and they have little to no control now. This transition period is beyond their scope. Unfortunately, most scholars have misanalyzed the previous transition and our past 65 years of experience to conclude that financial management can extract us from this situation.
Caveat: if you are right that technology and the companies that are producing it are “marked for death” — which may be true — this transition period is going to take much longer and be much more severe than it should be. If this attitude persists long-term, we will be in the same fruitless cul de sac Japan now finds itself in.
However, I don’t believe an anti computer automation stance will last long. Somewhere, somehow, there will emerge corporations that adopt new technology, use it correctly, reorganize their corporate structures to take advantage of it, and then ride the productivity improvements to dominate their industries.
Sincerely,
John Robb
In practice, it doesn’t seems like people pursue productivity gains simply to get the prices of their output to fall.
If you can make five computers and sell them for 1 car, where is the incentive to double your efficiency to make 10 computers and trade them for 1 car. You’re still only getting one car. The car maker who makes no attempt to be more efficient now gets 10 computers.
This seems to be what Steve Wozniak was getting at yesterday as quoted on scripting.com (the quote is gone now).
Oh no. Productivity works like this: it used to take 10 people to make a car, now it takes 1. This isn’t a metric for barter.
The incentive should be to use computer automation to radically drop production costs. In 1929, it took ~30% of our nation to produce the food we eat, now it takes less than 2%. It took the farm bust of the great depression to move people off the farm and into new jobs. What did they replace these workers with? Machine automation (tractors, milking parlors, etc.). Why? Because it cost less to produce food that way.
It does make me think that there is one thing missing in this phase transition that we had in WW2: a massive labor shortage. WW2 took much of the workforce and put them into the army and navy. Industry had to get more productive to support the war effort.
John
Somehow it doesn’t sound appealing. Government stood in the way of world trade in 1929, and if the people are going to suffer as much as you claim, they can do the same thing in 2002 with technology. I don’t think that’s what’s happening now, but progress can be rolled back by bad choices of the leaders. Technology has no special ability to overcome popular opposition, it can come in the form of elected officials who will clamp down on technology with regulation or maniacs like the unibomber.
What you’re proposing is domestic shock therapy, and we know where that went in Eastern Europe, it didn’t take, the people voted the old somewhat-reformed communists and once-and-future war criminals back into power. Given the choice between technologists who were going to crush them and the guys from the bad old days, they chose the bad old days.
In Japan, the people will choose to keep these zombie industries alive, because the electorate judges that letting them go under is likely to be worse.
The only way the subjects of these changes will go with us is if we can find a way to do this without ruining their lives.