Friday, March 09, 2012

Why I (Don't) Love Conservative Think Tanks

The below are links to two papers on Japan's economic policies, one from the American Enterprise Institute and the other from the Heritage Foundation.

AEI - Is Japan set to boom?
by John H. Makin

Heritage - Japan's National Budget: Time to Give Up on Keynesianism
by Derek Scissors and Kumi Yokoe

Two papers, each offering a completely different set policy prescriptions for Japan to follow to grow again.

Both wrong.

For critiques of the AEI paper (no one has bothered touching the Heritage paper, yet) see the NBR Japan Forum posts by:

Arthur Alexander

Richard Katz


Mike Smitka

(Full disclosure: I have had communications with Mr. Alexander several times and two years ago had dinner with Mr. Katz and Dr. Smitka at an Asian fusion restaurant where the food was...indescribably bad.)

Why link to papers that offer bad advice? Because the intense focus of Japan's elites on the goings on in Washington can result in these damn things confusing the policy debate in Japan.

Later - Troy supplies a wonderful comment. Please click on the link.


Troy said...

Japanese is the only foreign language I'm competent in, so the Japanese economy is of particular interest to me.

(My studies started Fall 1989 -- my timing of the top was rather impeccable)

I've commented a bit at Spike Japan's comments here, but reading the AEI piece I was struck by the total lack of understanding what the Japanese economy is actually facing.

For one, for QE to create inflation the new money has to actually get into the pay packets of the middle class (I see Katz says this too).

But the middle class of Japan is shrinking, both demographically and due to having its main employ -- manufacturing -- being taken by lower-cost Korea and China.

When I was FOB in Tokyo in 1992 the baby boom echo numbered 10 million in their early 20s. Now there are just 6 million in this cohort!

Additionally, even the latest wage rises put Chinese labor at $400/mo, or 3万, still peanuts in Japan. There is zero reason for a single mfg job to be located in Japan now. not when the Chinese can work all day for an hour of Japanese labor.

The Heritage hit-piece on its nemesis (Keynesism) doesn't have much, but I did see the writer not really understanding the true import of the fact that 95% of the colossal Japanese debt is internal.

What this really means is that both the debt and the vaunted Japanese "saving" has been equally fictional -- the Japanese haven't been saving, they've just been dodging paying taxes and calling it savings.

Now that the Japanese baby boom is hitting 60, there's going to be no way for them to collect their pensions on the backs of the following generation . . . by 2020, there will be under 20 million aged 15-30, and the demographics decline even more from there.

Economics' central failing today is in no way understanding the central importance land plays in the economy. The Japanese busted themselves out playing the land game in the late 1980s, and land prices are still stratospheric in Tokyo even today.

And any inflation will just go to reinflate land values any further, so inflation itself is no way out of their trap.

Mike Smitka said...

The Japanese have indeed been saving -- just not households. Instead corporations have continued to sock away retained earnings rather than investing (easy to understand) or paying them out to shareholders (aw, shucks, I was hoping).

The next-to-top entry on my intermittent Japan blog has a graph of the two trends.

mike smitka, washington and lee

PS bad food indeed ... but the Sichuan restaurant on K street, a couple blocks away, is decent and not horribly expensive