Three New Arrows for the Economy

Posted: Mar 16, 2014 12:01 AM
Three New Arrows for the Economy

April First is just around the corner and that means the feeble growth of the Japanese economy is about to come to a grinding halt. On that date the consumption tax (Japan’s national sales tax) will rise from 5% to 8%, meaning ordinary consumers will have to pay more for anything they buy. Even amateur economists know that when you tax something, you get less of it, so naturally consumption in Japan will go down, bringing the rest of the economy down with it. Prime Minister Shinzo Abe agreed to raise the tax as a means to pay back some of Japan’s massive debt, now more than 200% of GDP.

The rise in the consumption tax is one element in Abe’s so-called “Three Arrows” economic plan. This plan is often described as “bold” in the mainstream news media. But there is nothing bold about it.

The first arrow is a massive expansion of the money supply. Japan has had low-level deflation for the past fifteen years, and the country’s Keynesian economists have been saying that this deflation has been stifling the economy. Following their advice, the Abe administration wishes to create “targeted” inflation. But has this low-level deflation actually been detrimental to the economy, or is it merely a symptom that prices were too high? The United States had low-level deflation in the period 1875-1893 and that was a period of tremendous economic growth. On the other hand, previous attempts by governments to create targeted inflation, like that of the Johnson administration in the US in the late 1960’s, usually resulted in prices going up much faster than wages, causing much suffering among ordinary workers.

Likewise, arrow number 2, the old fashioned Keynesian approach of trying to pump up the economy with government spending has been tried so many times and failed so many times that it is a wonder that anyone still believes in it. In Japan it has been tried fifteen times between 1990 and 2008 with various “stimulus packages,” which did little more than stimulate the national debt to greater depths. Each time the politicians in Tokyo assured us that “This time the stimulus will work.” (You can fool me once, but can you fool me sixteen times?)

Abe’s third arrow, deregulation, will never be more than a few name changes or cosmetic alterations--shifting the chairs on the deck of the Titanic, to use the old metaphor. Any real efforts at deregulation will be resisted by the power-brokers in Abe’s Liberal Democratic Party and its supporter groups, who thrive on big government.

Curiously, Abe has the image of a tough guy in Japan and abroad. In reality, he is a political weakling, unable to stand up to the bigwigs in his own party.

If he were really a tough guy looking for serious solutions to Japan’s economic woes, he might consider the following proposals:

Arrow number one: stabilize the yen. Fire everyone who currently works for the Bank of Japan and replace them with free market economists. Stop playing the game of raising and lowering the exchange rate. Tie the currency, even if at only a small percentage like 10%, to a specific quantity of gold or silver held by the government. This suggestion will be unpopular with politicians because they like to manipulate the money supply, and tying the currency to precious metals will take that away from them, but it would be good for monetary stability and that would be good for the Japanese people.

Arrow number two: stop wasteful government spending. No more “stimulus packages.” If a town needs a road, the government should build a road, but it should not build a road because it thinks it will stimulate the economy. It should not spend even one extra yen.

Likewise, reduce the size of government and sell some assets to pay down the debt. Close down some ministries and reduce the size of the bureaucracy. Start by closing the Ministry of Education, Culture, Sports, Science, and Technology (MEXT) and selling the building it is housed in. MEXT does absolutely nothing useful for the Japanese people and, in fact, does much harm. Consider, for example, what many Japanese believe is the most important job of that ministry—education. Everything the ministry does related to education is harmful. Mediocrity is spread across the land. Look at the poor quality of second language education (i.e., English); Japan spends the most of any Asian country and has the worst results. Similarly, Japanese universities, which are the worst in the industrialized world, would be able to grow and improve without the suffocating hold MEXT has on them. For example, how many people know that MEXT determines how many students may enter a university each year? If a university comes up with a plan to attract twice as many students to its chemistry program because it just hired a famous scholar and has built a new laboratory, it cannot do so without MEXT’s approval.

The government should also close down the Ministry for the Environment, the Ministry of Land, Infrastructure, Transport, and Tourism, and demand that all other ministries not hire any new employees for five years and after that only replace bureaucrats who quit or retired.

Arrow number three: deregulation. Arguably Japanese businesses are not as heavily regulated as American businesses, but that is not to say that Japan has anything resembling a free market. One industry which should be deregulated is agriculture. The era of the family rice paddy is gone and young people no longer want to live in their ancestors’ village. Get rid of the regulations that make it difficult for big farming companies to buy up the land. Big farming companies can make rice production--as well as production of other grains, fruits, and vegetables--more efficient, cheaper, and higher quality. Other industries like banking, import-export, retail sales, and manufacturing would also benefit from less government. The government’s role in business should be in protecting people against fraud and theft, not in telling Mr. Yamaguchi how to run his farm or telling Mr. Sato how to run his tool repair shop.

Of course, none of these suggestions are likely to happen with the Abe administration. The only hope for Japan is that some young, open-minded, and fearless politician reads this article today, sees some truth in these arguments, and makes them real in the future.