I have a new article at Foreign Affairs, which draws heavily on the ideas in this blog post from a few months back, as well as this earlier post. The article about the monumental economic and social choice facing Japan: Whether to embrace neoliberalism. Some excerpts:
Faced with economic stagnation in the late 1970s and early 1980s, most of the world’s rich countries made a fateful choice. They lowered taxes; slashed government regulation in labor, financial, and other markets; opened their economies to global trade and finance; and privatized government functions...[M]ost [economists] concur that the reforms at least contributed to higher inequality, increased economic insecurity, and, at least temporarily, faster economic growth...
Buoyed by the last spurt of its postwar catchup growth, Japan managed to sail through the 1980s without having to face hard choices about the structure of its economy...
Many features of the Japanese economy that are commonly attributed to culture are, in fact, the result of Japan trying to run a modern economy without neoliberal reform: powerful but inefficient corporations, little job mobility, low unemployment, a relatively equal income distribution, and a job market that is heavily rigged against women...
In order to enact meaningful structural reform, Abe will have to reverse Japan’s most important economic policy decision of the last half century. He will have to embrace neoliberalism...
[T]he third arrow of Abenomics is not just about lifting Japan out of its long economic slump. It is about making a grave choice that will determine the fabric of Japanese society. The failure of the third arrow means continued corporatism, and the preservation of Japan’s social model even at the cost of a slow slide into economic backwardness. Abe’s trade and labor reforms offer a way out into a frightening and uncertain future -- but one that is potentially freer.Read the whole thing here!
Greenspan Says Yellen Was His Guide to Economics Research at Fed
ReplyDeletehttp://www.bloomberg.com/news/2013-11-07/greenspan-says-yellen-was-his-guide-to-economics-research-at-fed.html
Greenspan: "The Federal Reserve has got the most elaborate econometric model, which incorporates all the newfangled models of how the world works—and it missed it completely."
ReplyDeletemissed what? no one is perfect
DeleteHow long can they sustain the existing model, anyways? They've got a shrinking population of young people, many of whom are working temp jobs because the good "lifetime security" jobs are filled with seat-warmers. That's going to cause political problems in 10-20 years even if they don't liberalize parts of their economy.
ReplyDeleteBut if they liberalize their economy, they really need to re-build their safety nets at the same time. Their national-level welfare system isn't too hot, and the whole system is pretty dependent on local-level spending and assistance (heavier burden for cities).
Japan's bold new monetary experiment, like Bernanke's QE program, is a resounding success . Stocks and bitcoin keep going up but neither is a bubble. The federal reserve has done a good job since 2007 and deserves to be commended. I'm proud to have bernanke as our fed chief.
ReplyDeletelooks like stock is about to go parabolic
DeleteI tried to read the article, but could not even get to register for free.
ReplyDeleteIt may be an Internet Explorer thing but I will try at home later...
Frank
Abe’s trade and labor reforms offer a way out into a frightening and uncertain future -- but one that is potentially freer.
ReplyDeleteUgh. I think that equation, neoliberalism=freedom, is just facile.
Otherwise, a decent effort.
"Ugh. I think that equation, neoliberalism=freedom, is just facile."
DeleteNow, now: freedom means being able to choose which corporate master for which one will work long hours at low pay.
"Buoyed by the last spurt of its postwar catchup growth, Japan managed to sail through the 1980s without having to face hard choices about the structure of its economy."
ReplyDeleteThis is one of the really interesting, and fascinatingly powerful things, that's not in the standard utility function! (fight the paradigm power!) Growth, direction, is so powerful in utility, welfare, outlook, and politics, as opposed to absolute level.
You really see it's immense power when you look at it in reverse. How much more utility will someone have from $50,000/year if it's a growth from $20,000 than if it's a shrinkage from $100,000, or $1 million, but in the dominant paradigm in economics it makes zero difference in a person's utility -- a bias of the utility function that makes libertarianism and right wing policy look much better. And don't even get me started on positional externalities, relativity to others as opposed to your own past; that's truly the libertarian biased pink elephant of economics, along with not even caring about optimizing total societal utils, only Pareto optimizing.
DeleteThese actually show up in reasonably standard macroeconomic models. The first is known as "habit level of consumption", while the positional externalities are known as "external habit".
DeleteI rarely ever see internal or external habit in a model, and when I have it's not that well done.
DeleteEven "Pareto optimizing"... economists have a weird way of caring about that. Take the minimum wage, for example. Eliminating it would obviously not be pareto improving. But without it, we might at least end up in a situation where in theory we can't make someone better off without making anyone worse off. With it, we are merely in a position where in practice we can't make someone better off without making anyone worse off. Normally the goal with pareto optimizing is to make things better in one dimension without making them worse in any other. In economics, it is not this, nor is it to reach one of the many states where it is not possible to do so in practice, but to reach one of the many states where it is not possible to do so in theory, even if many are made worse off on the way there.
DeleteIn any case, applying the concept of pareto optimality to a 7 billion dimensional optimization problem is insanity.
Fascinating that Taiwan is ahead of Japan. They were so far behind, even not first world, not that long ago. And South Korea is close.
ReplyDelete"In order to enact meaningful structural reform, Abe will have to reverse Japan’s most important economic policy decision of the last half century. He will have to embrace neoliberalism."
ReplyDeleteAn alternative (or variant, depending on how you define things) is flexicurity, which I really like. Have the efficiencies of a flexible economy, but then deal with inequality and insecurity through highly progressive taxes, a strong and smart safety net, and a high level of public investment.
Total factor productivity, as it's intended to mean, is difficult to measure. If time permitted, a good post would be on the pros, cons, and problems with TFP as it's currently measured.
ReplyDeleteIt is always disconcerting to find certainty growing out of ignorance. Mr. Smith clearly knows nothing about Japan; he appears to know little about economics either. The Hoshi & Kashyap paper Mr Smith introduces in support of his claims contains this sublimely blithe suggestion, the plank on which his whole thesis rests :
ReplyDelete“Economists have demonstrated that long term growth patterns are generally well
described by the so-called “neoclassical” model of growth. This model focuses on the supply side of the economy and we will use it to organize our discussion of potential causes of the slowdown.”
Economists have done no such thing. This "neoclassical" framework, which relies on a "well-behaved" production function (wonderful name! - are there poorly brought-up "yob" production functions?), was comprehensively discredited as being conceptually nonsensical and mathematically tautological by Joan Robinson, Piero Sraffa, et al, roughly 50 years ago (at the time it was initially advanced). In response to this critique, it had to be admitted even that it was no more than a "parable" or a “fairy story” (Samuelson's own vocabulary) and a matter of “faith” (C.E. Ferguson's characterisation). While as a mathematical doodle it might amuse people who don't get out enough, it has no relevance to any actual economy. It thus has no power to "explain" why Japanese growth slowed and stayed so low post-1990; nor implications for what sort of policy Japan should follow now.
Doubtless Mr. Smith is young enough to be conventionally ambitious and so bound not to question orthodoxy; or even, perhaps, is unaware of the debates which surrounded the original propagation of this nonsense. But what he incautiously proposes in respect of Japan is uncomfortably close to "orientalism"; it so clearly is not "economics". Of course, as Joan Robinson noted so long ago (1970), criticism can have no effect; because, for neoclassical economists, it is - in their own words - "a matter of faith”.
tl;dr
DeleteThis comment gets high marks for understated humor.
DeleteAnd points for reprising the old question why Joan never got a Nobel.
But why anonymous?
tl;dr
DeleteYour loss.
OK I'll read it and offer some responses.
DeleteMr. Smith clearly knows nothing about Japan; he appears to know little about economics either.
Dunning-Kruger
Doubtless Mr. Smith is young enough to be conventionally ambitious and so bound not to question orthodoxy
That sounds like a diss you read somewhere and copied...
`why anonymous`? Because I am a bit of a duffer with a computer - I am trying again with this reply, though professional circumspection requires a nom de plume.
DeleteOne can feel legitimately disappointed (though perhaps not surprised) that Mr Smith`s responses contain no economic argument. Perhaps, if he is in no mood to answer a blog comment (lest it emanate from someone who might be, God forbid, `not a trained economist` (and why should he be? - though the thought does occur to one that it is dogs and performing seals which are usually described as `trained`, not thinkers)), he might be kind enough to answer Joan Robinson. Were he able to offer a theoretical defence of the doctrine he espouses, but has given no evidence that he understands, against her critique it would constitute a major achievement - one which eluded both Samuelson and Solow, though, of course, that`s no reason to assume that Mr Smith cannot pull it off.
though professional circumspection requires a nom de plume
DeleteNo it doesn't, and stop writing in that awful prolix style.
Then let me put it differently: you base a thesis about a country you do not understand on a theoretical construct, the structure, history and invalidity of which you appear not to comprehend. In what way is your commentary different from that of the `just off the boat` gaijin in a bar in Roppongi who finds, horror of horrors, that Japan is not just like America?
Deleteyou base a thesis about a country you do not understand
DeleteHow do you know I don't understand it? Maybe you don't understand it, and that's why you don't realize that I do understand it. Ever thought of that?
In what way is your commentary different from that of the `just off the boat` gaijin in a bar in Roppongi who finds, horror of horrors, that Japan is not just like America?
Because I read a bunch of econ papers, talked to a bunch of Japanese econ professors, bureaucrats and businesspeople, and have been following the issues in the news for years.
Indeed it is very easy to underestimate someone over the Internet. Perhaps what they write only hints at what they know. I have no doubt that you have done the work you say you have; many of us have, and some of us over a thirty year period of living here. On the other hand, the interesting feature of the work that you have done is that it appears to have had so little effect. Doubtless a susceptibility to trite and journalistic perspectives is just a phase we all go through and some grow out of, but would anyone with a couple of trips to Italy, for instance, under their belt propose to understand Italy to the degree that they could comment in the unreflective and incautious way that you do about Japan? I hope you won't find it impertinent for me to suggest that this might be an opportune moment for you to begin to take seriously not only the initial controversy occasioned by the propagation of the neoclassical growth model but also the implications of more recent papers such as Felipe and Fisher (2003) on the Aggregate Production Function which "evaluates the standard reasons given by economists for continuing to use aggregate production functions in theoretical and applied work, and concludes that none of them provides a valid argument" before continuing to advance prejudices about Japan on the basis of theories dependent upon this discredited construct. Unless, of course, it really is all "a matter of faith".....
Deletesome of us over a thirty year period of living here
DeleteAhh, you're one of those. Now I understand. No more need be said... ;-)
"Abe’s trade and labor reforms offer a way out into a frightening and uncertain future..."
ReplyDeleteAgain, it need not be this way -- flexicurity. What if the trade and labor reforms were coupled with a great increase in unemployment insurance, funds for education and training, and the safety net in general; and more progressive taxes. This would make neoliberal change a lot easier, but it would require raising taxes, which is difficult.
Whatever the merits of neoliberal reform or your view of Japan's structural problems, surely it's obvious the comparison to developed countries in the late '70s is facile? Japan has, after all, a deflation problem even Abenomics doesn't seem able to beat. Not how I remember the '70s
ReplyDeleteWhat I'm saying is all about microeconomics and the productivity slowdown of the 70s/80s, not about macroeconomic policy.
Deletethe productivity slowdown of the 70s/80s
DeleteIf there was productivity slowdown in the 1980s then maybe those neo-liberal policies of the late 70s and early 80s were not such a success?
The productivity slowdown started in the 70s...it seems to me that neoliberalism was a response to that slowdown. Productivity eventually accelerated again in the 90s.
DeleteThe productivity slowdown started in the 70s
DeleteIn the 1970s we had a couple of major things happen: (1) women entered the work force in large numbers; (2) young workers (baby boomers) entered the work force in large numbers; (3) American industrial workers found themselves competing with Japanese industrial workers; and (4) the backlog of market and technological opportunities that built up from 1929 to 1945 had been exhausted by thirty years of rapid growth (1945 to 1975). The anti-trust actions against IBM and AT&T may well have crippled two of America's technical champions during the mid 70s to mid 80s.
Taken together, it is not really a wonder that productivity growth slowed down around 1975.
Absalon, welcome back! :-)
DeleteIn the 1970s we had a couple of major things happen
DeleteI left out the 1973 energy crisis and price controls.
The liberalization of the late 1970s may have grown the economy as a whole but all of the growth went to the top few percent of the population. The middle class has stagnated or declined. The end game of the liberalization is the financial crisis and the current assault on entitlements.
ReplyDeleteWhat does it profit an electorate to support changes that will make a few people much richer and everyone else poorer? Japan might benefit from liberalization but the American example does not prove that hypothesis.
Anonymous,
DeleteWhat is your question?
Noah said:
[M]ost [economists] concur that the reforms at least contributed to higher inequality, increased economic insecurity, and, at least temporarily, faster economic growth...
and he gave a response to the question why
Then again, the corporatism has high costs as well. Slack productivity makes the entire country poorer, of course; Japan’s per capita income, which once rivaled the United States’, is now less than three-quarters as high, a difference of $13,000 per person per year. But the social costs may be even greater. The two-tier labor market, which has been Japan Inc.’s response to foreign competition, consigns half of new labor market entrants into low-status part-time or contract work, from which few can ever escape. And Japan’s gender inequality prevents many millions of Japanese women from feeling like respected and equal citizens (and is probably one factor behind Japan’s low fertility rate)
That may be a bad trade-off, it may be a bad or incomplete answer, but it's been asked and responded to. At least pretend like you have read the article.
You are close to making some interesting points.
Dan - I did not intend my comment to be a question. I do not think I am just rewording a point already made by Noah.
DeleteGreat article Noah!
ReplyDeleteI wonder if there have been any studies illuminating how Japan's economy, shaped by the US in 1940s and 1950s, reflects the US economy of the 1940s and 50s, with women not present in corporate jobs, large corporate domination, life-time employment in an upper, sheltered tier, a fixation on manufacturing, etc....
It is almost as if Japan, on the surface very modern, still has all of these social-structure antecedents from 60-70 years ago in the US...
Frank
Yep.
Delete"Many features of the Japanese economy that are commonly attributed to culture are, in fact, the result of Japan trying to run a modern economy without neoliberal reform: powerful but inefficient corporations, little job mobility, low unemployment, a relatively equal income distribution, and a job market that is heavily rigged against women. "
ReplyDeleteOne question: what is low unemployment doing here? Is a high unemployment a characteristic of neoliberalism? I would rather expect that rigid labor markets are correlated with higher unemployment, maybe Japan is the exception here.
Corporatism produces even lower unemployment, by encouraging corporations to find make-work during bad times, keep unproductive workers on the payroll, etc. And Japan doesn't have a generous welfare state, making workers scared of unemployment. Also, lifetime employment makes it tough to hop jobs, reducing frictional unemployment.
DeleteThat said, realize that Japan's working-age employment-to-population ratio is about the same as that in the U.S. "Unemployment" is often just a label.
Thank you for the clarification. I do not know the specifics of the Japanse labor market very well.
DeleteI was thinking about European countries that are (or were) known for their rigid two-tier labour markets (France, Spain, Greece,..). Their unemployment rates where already quite high before 2008.
But anyway, your article is about Japan.
Why does it have to be one or the other? What sane country, looking at the problems faced by the United States and Europe, would say "yes, I want those same problems here. They are better than my problems"? Neoliberalism seems like an easy choice, but one which will create long-term inequality, increased concentration of wealth and therefore reduced freedom as the country slides into oligarchy.
ReplyDeleteI really don't see why Japan can't or shouldn't aspire to a Scandinavian model, except maybe for "culture" (and that can slowly be changed). That way, you get rid of the protectionism but you don't have starving masses.
Although the complementary institutions, such as the strength of competition policies, market segmentation, entry constraints and standardization of labor relations change, as long as Japan has an active state, which both participates in economic development (continuing the legal power of the Ministry of Economy, Trade and Industry-METI over a broad policy area) and encourages the corporations (prevalence of the dominance of alliances between large firms and state elites) considerably, she continues to have a corporatist institutional regime. Moreover, Japan is a state-corporate polity in which the level of the collective agency is not low (societal), but relatively high (statist) and the organization of society is not associational, but corporate. The institutional regime and polity have interdependent relationships and it is very difficult to see the change of both them radically.
ReplyDeleteThis seems like a false dichotomy of a choice, either don't reform and hope for the best or jump to the ship of faith of neo-liberalism, an ideology that has failed utterly everywhere it's been implemented. hmmm...seems like a tough choice, the answer might lie in the middle.
ReplyDeleteMr Smith
ReplyDeleteYour observations on hostile takeover rulings and court cases in Japan, and conducting LBO/MBO transactions there seems to somewhat off the mark. I was curious what current evidence there is for the claims you make in your Foreign Affairs article and some of the blog posts you base it on:
1. "hostile takeovers are still prevented by the courts"
Are they? What case are you referring to where a high court has ruled against a hostile takeover?
2. "it is very difficult to do a leveraged buyout of a company." (in Japan)
Really? By difficult do you mean to get the financing or to do under the law? As in my experience the financing is extremely easy to get and the law is perfectly amenable to this.
Eddie
Delete1. Bulldog sauce vs. Steel Partners and arguably Live Door/Horie vs. TBS. Also, you mention high courts, he never mentions such thing, just courts.
2. Though your points are valid, it is difficult to buyout a firm due to cultural reason (this I am sure you know). Moreover, just look at the volume of LBO deals in Japan (vs. volume in other countries/overall M&A activity) and you can see it is abysmal.
Though Noah perhaps could have fleshed out his ideas a bit more, he wasn't off the mark. Unlike writing a blog post, most magazines will set a maximum word count for an article, therefore some content gets discarded.
Tim
er tim have you read the Tokyo supreme court ruling regarding Bulldog?
Deletethe bulldog steel partners case did no such thing.
in fact, the Supreme Court ruling if anything did the exact opposite
It very clearly affirmed the District Court's ruling that the identity of the decision-maker determines the legitimacy of a takeover defense, i.e. a preference for shareholders over managers.
It also did not adopt the High Court's ruling that a discriminatory stock warrant may be used because a hostile bidder is an "abusive acquirer."
The ruling rejected Steel Partners argument that the warrants were ‘grossly unfair’ within the context of Article 247 of the Corporation Law, noting when a company issues SARs free of charge to all shareholders, the SARs should have identical terms and conditions.
However, and moreover, equality (i.e. non-discrimination) is not absolute. If the acquisition of a controlling interest would be likely to jeopardise the existence or development of the company and thus lower its corporate value and thus damage the interests of the company and the joint interests of its shareholders, then discriminatory treatment against that acquirer may be justified in order to prevent that damage, unless the discriminatory treatment contravenes a general principle of fairness and is thus unreasonable.
Whether an acquisition lowers a company’s corporate value and damages the interests of the company and the joint interests of the shareholders should be ultimately determined by the shareholders themselves “because the interests of the company are those of the shareholders”
Given an overwhelming 83.4% of all votes (this high level was specifically flagged by the court) shareholders other than Steel Partners had concluded that SP’s acquisition would lower Bull-Dog’s corporate value and thus damage its interest and the joint interests of the shareholders.
I.e. the highest court very specifically ruled that it was up to shareholders to decide on these matters by a vote. It was not the court's part to do so.
"arguably Live Door/Horie vs. TBS"
I assume you mean Nippon Broadcasting System as Horie never took a swing at TBS. If that is the case, I am afraid you are very off-the-mark
NBS announced on February 23 2005 it would issue warrants allowing Fuji TV to purchase newly issued NBS shares to dilute Livedoor. This was the first time share options were used as a defensive measure in Japan.
Livedoor applied for a court injunction and the Tokyo District Court ruled in favor of Livedoor on March 11, declaring that NBS’s move was in violation of the Commercial Code.
NBS appealed but on March 23 the Tokyo High Court upheld the ruling, at which point NBS announced that it would not pursue the case any further.
The Tokyo District and High Court emphasized the warrants plan was approved by NBS’ board only, and not by a shareholders meeting.
Both the district and High court ruled very explicitly against this behavior.
So please tell me how is this an example of the court frustrating M&A?
We have the Supreme court also affirming this in Bulldog. A similar ruling was also made by the district court in Nireco's case in 2005.
I remain intrigued by the line of reasoning that both you and Mr smith pursue that the courts frustrate M&A activity.
again, please show me the court ruling which shows this and which has not been struck down by a higher court?
"Also, you mention high courts, he never mentions such thing, just court"
Yes I mention them because they are what cases are referred to on appeal. Hence, they tend to be rather important if you want to understand the legal system.
I would suggest both you and Mr Smith try reading the court rulings before making such observations, or at least talk to some lawyers in Japan.