Your Lying Eyes

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10 February 2009

Oh No, Not Like Japan!

Everyone's worried we could end up like Japan. In his press conference the O-man admonished the country what fate could await should we say "No, we can't":
I think that what I've said is what other economists have said across the political spectrum, which is that if you delay acting on an economy of this severity, then you potentially create a negative spiral that becomes much more difficult for us to get out of. We saw this happen in Japan in the 1990s, where they did not act boldly and swiftly enough, and as a consequence they suffered what was called the "lost decade" where essentially for the entire '90s they did not see any significant economic growth.
I think if that should be our fate - a decade of 1.5% real growth - we ought to declare a national holiday. I'm afraid what lies in store is something much worse than that, and Obama's stimulus can't possibly prevent it. But where do people get the idea that comparisons to Japan are remotely valid?

Around 1990, Japan suffered a sever asset bubble crash. But aside from this, both nations having advanced modern economies ranking first and second in the world, the U.S. and Japan could hardly be more different. Japan has few natural resources, yet exports heavily (17% of GDP vs. the U.S. at 9%). Japanese companies invest more heavily (22.5% of GDP vs. 14.6% U.S.) and at the time of the crash a very high personal savings rate. Japanese foreign investments ($597b) vastly exceed foreigners' investments in Japan ($140b). And Japan's reserves of foreign currency and gold dwarf those of the U.S.A ($954b to $71b).

With these high rates of saving and investment, there is some logic to Japan attempting some government stimulus to offset all the money being socked away. And given the huge current account and investment surpluses, Japan could surely afford to throw some money around to try and jump start things. But even given these favorable conditions, government spending had little impact when tried.

Here in the U.S., on the other hand, we've just gone through one helluva spending spree. We carry an immense trade deficit ($568b in 2008, a big improvement over prior years), and foreign entities - foreign governments in particular - hold immense stockpiles of U.S. treasuries as well as other American assets. (Our foreign debt amounts to 84% of GDP - and that's as of June 2007 before our recent $1 trillion deficit. Japan's foreign debt is 33% of GDP). We have no excess savings to free up, nor do we have any reserves stockpiled we can tap into. What in God's name would lead anyone to believe such a stimulus package could work here?

Source: CIA World Factbook.

Oh, and one more thing - Japan's per capita GDP is listed as $35,300, while the U.S. is listed as $48,000. What makes us think our standard of living should be 33% higher than the Japanese? Of course I'm glad it is, and fully intend to enjoy it while it lasts.

Related: Dr. Housing Bubble's look at the "Is this another Japan" question.


Blogger Michael Carr - Veritas Literary said...

Your nation's per capita income may be higher than Japan's, but that doesn't mean you are personally better off than the average Japanese.

For example, I live at a higher standard of living than most of the people I know, but my wife, my four children and I don't have anywhere near $288,000 per year (6 X 48,000).

February 11, 2009 8:22 AM  
Anonymous Anonymous said...

We should be as lucky to be like Japan.

February 11, 2009 11:50 AM  
Blogger DWBudd said...

An interesting treatment of the "press" conference (liberties taken with the terminology). Of course, it is foolish to compare what may happen in the States with what did happen in Japan, when the two cultures could scarcely be more dis-similar in many real ways.

I think the incredible problem with the press conference (aside from the ridiculously inappropriate question about Alex Rodriguez and the fact that someone from "The Huffington Post" actually got to ask a question) was the allowed false dichotomy that the alternative to the porkulus proposal is nothing. *No one* is proposing that the government do nothing at all, so why this was not pointed out is close to scandalous.

Also, Mr King needs to be reminded that when comparing aggregated statistics such as per capita GDP, one knows next to nothing at all about individuals within the population (i.e., his example). That is the inherent nature of complete, sufficient statistics.

February 11, 2009 3:16 PM  
Blogger Michael Carr - Veritas Literary said...

But that was exactly my point. The GNP per capita of the United States is much higher than that of countries like Japan or France, but this is largely a function of great wealth in the hands of a small minority of the population.

It should also be noted that GNP includes things such as tax preparation, cancer treatment, and hardware for foreign military adventures. Reducing these things through better tax codes, healthier lifestyles, and fewer wars may reduce GNP, but it wouldn't reduce the real wealth of society or its individuals.

February 11, 2009 3:36 PM  
Blogger DWBudd said...

I am not sure that I agree with your treatment here, on either counts.

First, that the per capita GDP of the US is much higher than France or Japan largely because of the upper tail of the distribution deserves a bit more exposition. It's wildly held as self-evident that wealth disparity in the US is greater than it is in most first-world countries, but what fraction of the difference in GDP amongst the three is due to wealth at the top (and again, GDP is not a function of WEALTH, but rather, PRODUCTION)?

Second, that reducing cancer treatment, inter alia, would reduce GNP is a bit more slippery. The way that treatment of disease costs are allocated, competition for research dollars between cancer and other illnesses is somewhat a closed set - so if cancer is reduced, then that money likely will be allocated towards other illness. And likewise, virtually all models in health economics (budget impact, for example) sensibly treat health care as a drag on the economy for other things. Put simply, IF I did not have to spend a certain amount of money on, say, Lipitor, I might spend that money on holidays or television sets, or something else.

February 11, 2009 3:44 PM  
Blogger Michael Carr - Veritas Literary said...

Fair enough points.

In some ways, GDP is a mathematical model of an abstraction and it's very difficult to quantify many aspects of national production.

For example, if you take the current GNP and then unwind it year by year into the past, using published economic growth, you eventually reach the absurd position of showing per capita income approaching zero, in real dollar terms.

February 11, 2009 4:09 PM  
Anonymous Anonymous said...

Hey ziel,
More cat pictures!

February 11, 2009 10:44 PM  
Anonymous Anonymous said...

"Healthier lifestyles" cannot reduce the amount of money spent on health care.

That amount is largely driven by high expenses for end-of-life treatments. Given that every single one of us is going to have an end-of-life ....

This is a triage question when you get down to it. Given finite resources for health care, how much should be spent on heroic measures for people who are not far from their natural life-span?

February 12, 2009 12:23 AM  
Anonymous Anonymous said...

Z man, i know I'm getting off track here, but I went to pay my mortgage on line this morning and the gov paid it for me! Praise Jesus! I really don't have to worry about my mortgage or putting gas in my car.

February 14, 2009 9:18 AM  

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