Two and one-half years after its inception, Abenomics isn’t working. Economist Richard Katz believes that is because Abe’s three policy arrows don’t really exist and to the extent that they do, they have been largely rhetoric. If the policy arrows were truly implemented, ensuing growth would return government coffers to fiscally sustainable levels. Beacon Reports spoke to Katz to find out why Abe’s policies have failed and what can be done to fix them. He is editor-in-chief of the Oriental Economist Report.
According to Katz, piddling, symbolic third arrow reforms have left Japan wasting its most valuable resource – its people. Many are trapped in institutions and corporate cultures that don’t allow for creative destruction. Growing numbers work at irregular jobs that don’t offer a living wage, a career path or a personal safety net. To unleash human potential and raise productivity growth, Katz says Japan needs policies to make it politically as well as economically safe for increased turnover of firms and of people within those firms. He aims to quicken the pace by which human capital is reallocated to its best use.
As a priority, Katz recommends that Japan adopt policies which offer equal pay for equal work, a stronger social safety net and other programs which promote labor mobility. Doing away with the differentiation between regular and irregular work would improve consumer spending by offering a living wage to all workers. A stronger social safety net and other measures promoting labor mobility, such as retraining programs, would help people to move from company to company, business to business and sector to sector. If correctly implemented, they would provide firms with a flexible way to downsize.
Policies that ensure equal pay for equal work would cause real wages to rise. Astonishingly, 37% of Japan’s wage earners now hold irregular jobs that pay 30% – 40% less per hour than regular ones. Katz argues that equal pay for equal work would achieve through legislation what Abe has so far failed to do by asking – to put profits now lying fallow in corporate vaults into the pockets of the consumer. That would encourage spending by people whose real wages declined to levels so low they had to dip into household savings for the first time in 2013. “People will only spend more if they have more to spend,” reasons Katz.
Simultaneously, Japan should bolster its social safety net to protect wage earners from the turmoil caused by creative destruction. Irregular workers, for instance, are not entitled to many benefits under the current unemployment insurance system, where they accrue in accord to length of employment. That, says Katz, incentivizes workers to cling to their full-time jobs. “Japan’s social safety net is like an umbrella designed for a climate where it never rains,” he says. Closing the leaks would make creative destruction safer for people.
Japan’s social safety net is like an umbrella designed for a climate where it never rains
These policies might even soften Japan’s demographic problem as irregular workers are not starting families. Only 25% of males that hold irregular jobs aged between 25 and 34 years are married compared with 75% of those in regular employment. The longer they remain in irregular work, the harder it becomes to find regular ones. “These men either can’t afford to marry or women don’t find them attractive as providers,” says Katz. He asks, “If people don’t receive a living wage and don’t start raising families, how will Japan ever be able to solve its demographic problem?”
The measures would also pave the way for closure of Japan’s many zombie companies. Zombies are kept alive to preserve low unemployment. The government achieves this through low interest rate policies which reduce bank interest payments that firms need to pay on loaned amounts. Allowing Japan’s moribund firms to close in a politically and socially safe way would increase economic metabolism and spur growth.
Katz argues that Japan could unleash productivity growth by lifting its backwards industries up to world benchmark levels. For instance, struggling but once great brands like Sony, Panasonic and Sharp continue to dominate in Japan – where not a single new market entrant of any significance has emerged since 1946. In the US by comparison, 8 of the top 21 consumer electronics hardware firms, including Cisco, did not even exist before 1970. In Japan, “the incumbents keep holding on,” says Katz (Note the recently announced bailout of Sharp by its bankers).
The food processing industry is another case in point. Japanese spend about 14% of their household budgets on food compared with Americans (6%) and the British (9%). Monopolistic practices, cozy cartels and import barriers each contribute to the problem. Through government sanctioned anti-competitive practices, for example, the people of Honshu are denied cheaper dairy products produced by the more efficient farmers of Hokkaido.
To lift productivity growth, Katz recommends that politically-motivated exemptions to the Anti-Monopoly Act, like those granted to Japan Agriculture, be eliminated. Current legislation under the Japan Fair Trade Commission (JFTC) should also be enforced. The Trans-Pacific Partnership (TPP) should be used to catalyze reforms rather than to avoid them. To do Womenomics “right”, ‘maternity harassment’ cases involving would-be career women who are currently penalized for getting pregnant, should be aggressively pursued. These are just some of the regulatory and non-regulatory reforms Katz says the Administration could take to unleash growth.
Abenomics is dead. Long live Abenomics!
The first arrow of monetary easing was to stimulate the economy through lowered interest rates and a cheaper yen. These were to end deflation, spur companies to invest and lift consumer spending. In fact the opposite happened. Exporters like Toyota and their shareholders benefited from rising export sales, while real wages shrank in relative terms as the price of imported goods rose. “People responded by spending less because they had less money to spend,” says Katz. Meanwhile, firms continued to hoard profits equal to 5 – 6% of GDP each year. In short, the first arrow failed to achieve its goal and to the extent that it did, he believes the costs outweighed the benefits.
The second arrow also failed to hit its mark. By raising the consumption tax too early, fiscal policy acted as one foot on the accelerator and an even heavier foot on the brake. Katz believes the Bank of Japan’s (BOJ) Governor Kuroda is spooked by ideological hobgoblins. “Kuroda continually argues against his own cause by pushing fiscal austerity in fear that interest rates will rise if bond markets come to believe the government is monetizing its debt,” thinks Katz. Kuroda’s fear may be misplaced. As long as Japan continues to finance its own debt, the BOJ should be able to keep interest rates low through open market purchases of Japanese government bonds (JGBs). Katz argues that the BOJ’s actions reduce the possibility of a bond crises in the short-term as it shrinks the ratio of JGBs to GDP held by the private sector.
Kuroda continually argues against his own cause by pushing fiscal austerity.
The third arrow is more talk than action, Katz believes. He laments the Administration has made poor use of the first and second arrows which could have been used to facilitate third arrow reforms. Macroeconomic stimulus should have been used as anesthesia to enable the patient to undergo the surgery of structural reforms. “You can’t do the reforms without the macroeconomic stimulus,” says Katz, “but if you do the stimulus without the reforms then it’s not anesthesia. It’s a narcotic to avoid making needed changes.”
Katz does not think the three arrows are “bad”, just that each won’t work without the support of the other two, and all must be shot in the right order. The right order for Japan is to get the recovery first and only then work on the long-term problem of bringing down the budget deficit. He advises the Administration, “Don’t just say three arrows, actually do them.”
Don’t just say three arrows, actually do them.
His cure combines Keynesian monetary and fiscal stimulus to boost Japan’s economy at the same time that real (not rhetorical) reforms are implemented. Under his plan, the government would not raise the consumption tax until the economy achieved benchmarks of recovery. They include conquering deflation and narrowing the output gap. The Administration might also cut taxes and invest in public spending that would not amount to ‘building bridges to nowhere’ to stimulate consumption. For instance, it might pay the cost of a high school education, currently paid for by parents.
Katz’s thinking is striking in that he rejects the notion Japan suffers from secular stagnation. Under the secular stagnation theory, originally coined by Harvard professor Alvin Hansen in 1938 following the Great Depression of the early 1930s and later resurrected by former Treasury Secretary Laurence Summers, an economy can face long-term (non-cyclical) diminished growth prospects when resources are restrained. While Katz admits an economy can face resource shortfalls, he says, “The idea that Japan is stuck because there’s no way to solve its problems is a Malthusian outlook that’s been wrong for 200 years. It is still wrong.”
Katz discounts reports that the country is working at full capacity. The headline unemployment figures for instance, suggest Japan is near full employment. He believes these statistics distort reality because they don’t fully take into account underemployed, irregular workers. “People want regular jobs that firms aren’t offering, whereas companies are offering the irregular jobs that people don’t want,” he says.
Japan still has room to grow. It needs to invest in its people and stop wasting human capital. Believing the nation’s ability to grow is limited only by bad policies and institutions that perpetuate bad outcomes, Katz quotes Shakespeare:
The fault, dear Brutus, is not in our stars, but in ourselves.
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