|
The Japanese economy, second largest and envy of the world in the 1980s, is now stuck in the 8th year of its worst depression since World War II, with no recovery in sight. Their famed "lifetime employment" is a bitter casualty. Some fear Japan may be prophetic for the rest of the world if solutions aren't found soon.
Micro vs Macro. Like other economies that are now performing poorly, Japan would quite probably benefit from some of the banking and other "structural reforms" now being so widely recommended. But the Keiretsu system of interlocking corporate control and finances, mutual support and close government relations also existed during the 1980s boom. While there may be stronger motivation for making such reforms today, actually carrying them out would obviously be much easier in a prosperous full-employment economy.
Price-depressing "excessive capacity" in a depressed economy tends to rapidly disappear in a vigorous recovery. The U.S. Resolution Trust Corporation's liquidation of failed savings & loans became much less painful and less costly than expected during the ensuing rapid growth of the economy. Thus, the most critical need today is for more systematic coordination of macroeconomic policies to get the economy back on a credible, initially-fast but "soft-landing," recovery track.
The web of credit and macro policy. As the present crises illustrates so well, credit relationships tend to form an intricate interdependent chain -- or web. Consumers, business firms and governments that are quite capable of servicing their debts in a prosperous, full-employment economic environment may become unable to do so in a depression -- even a mild one. This puts financial pressure on their immediate creditors, which puts pressure on banks and reduces general finanical confidence, in a vicious cycle. Breaking into this credit vicious cycle is an important key to recovery -- and a primary responsibility of macroeconomic policy. "A rising tide lifts all boats, if they are not already sunk."
The disarray of economic "science" and economic accounts. Unfortnately, traditional macroeconomic "science" is now in such shameful disarray that it often gives conflicting and inappropriate policy advice. Although not so generally realized, this disarray is itself due largely to the conceptually handicapped and functionally unintegrated condition of our present macroeconomic accounting systems, which keeps them from providing the empirical data needed for effective economic management.
The National Income and Product Accounts (NIPA), which are unble to deal with money and credit, leave a financial gap between financial saving and credit-financed GDP investment. The Flow of Funds Accounts (FOFA) have their own conceptual flaws which prevent them from filling the NIPA financial gap with reliable data, and they are also unable to deal empirically with the key relationship between money growth and economic growth.
These data weaknesses are compounded because traditional Keynesian theory is based largely on the NIPA accounts, and traditional (Friedmanite) "monetarist" theory does not even have a precise and consistent definition of money. The result has been that the traditional Keynesian and monetarist "economic stimulus" policies such as those tried in Japan are empirically ad hoc and uncoordinated, with monetary and fiscal policies considered alternative rather than complementary.
What has long been needed is a conceptual framework which can "complete the Keynesian Revolution" by making possible effective functional integration of the FOFA and NIPA, as a reliable empirical basis for systematic coordination of macroeconomic policy. The IDMF conceptual framework attempts to fill this need.
2. The Integrating Dynamic Money Flow (IDMF) Conceptual Framework
Please click here now for a brief but essential IDMF summary before continuing.
3. The basic financial imbalance
Japanese short-term market interest rates remain close to zero, and half of the $10 trillion of household financial assets are in bank deposits yielding less than 1%. This is clear evidence that the economy’s total demand for credit (Primary Borrowing) does not provide sufficient outlets into credit-financed GDP spending for both the economy's total Primary Financial Saving, and also the amount of bank-loan-created New Money needed (in a credit-money financial system) to grow the economy at an appropriate recovery rate. [2]
Several reported Japanese tendencies tend to exacerbate this financial imbalance, through either the National Credit Balance or M1 money growth, or both:
Temporarily [5] reduce the most easily adjustable withholding or sales tax rate enough to increase the total federal budget deficit enough to increase real interest rates to their long-term norms (which, in Japan, are very low by world standards). [6] This could be done most precisely and efficiently by the FASTA (Formula-Administered Stabilization Tax Adjustment) fiscal policy tool.
If economic uncertainty causes the public to save part of the tax cut rather than spend it, the FASTA policy tool would merely continue cutting the tax rate and increasing government borrowing until the supply and demand for credit is re-balanced at normal interest rates. Establishing this credit balance, so as to permit Monetary Policy to finance a suitable recovery rate of money growth, should be the primary consideration in fiscal policy, no matter how high the Stabilization Deficit goes. An economic crisis of this severity should be considered the moral equivalent of war, and wars tend to be financed very largely by government deficits.
This tax cut would undoubtedly be popular with most of the public, and would thus offer political support for the less palatable structural reforms.
This method of raising interest rates to reduce capital flight would tend to be more effective, and cause fewer bankruptcies and less unemployment, than trying to do it by restrictive monetary policy.
Monetary Policy
Determine the current trend value of the Money-Demand Ratio (MDR) growth rate as soon as possible, because it is likely to be significantly distorted by the current excessively low interest rates and financial fears. Then make sure that bank reserves are increased enough to enable the banks to buy enough of the increased treasury securities (and enough private sector loans that would be economically sound in the anticipated better financial environment) so that the M1 money supply can be increased according to the Monetary Policy Formula.
If these two crucial policy tools had been in place during the 1980s, it is highly likely that the "bubble economy" would not have developed.
5. Likely immediate effects
These precise and systematically coordinated macroeconomic policies, based on generally understandable formulas, [7] rather than ad hoc analytical judgments and political decisions, would tend to greatly improve the general economic environment, with the following specific effects:
Note 2
As in the U.S. in 1932, trying to use monetary policy alone to "prime the pump" is "like pushing on a string." In a credit-based monetary system effective money-growth depends on adequate demand for credit, and banks feeling safe to lend enough. In a depressed economy those conditions can be provided only by government fiscal policy -- i.e. by increased government deficits.
(back to ref 2)
Note 3
Moreover, without an increase in Primary Borrowing this alone would probably not achieve the needed recovery rate of money growth.
(back to ref 3)
Note 4
The IDMF concept of re-establishing systematically coordinated basic financial balance is much more precise and "scientific" than the traditional ad hoc approach to "stimulating the economy."
(back to ref 4)
Note 5
Whether or not a permanent tax cut would be functionally appropriate depends on whether it is needed to balance the full-employment Policy Budget. Using the flexible FASTA (Formula-Automatic Stabilization Tax Adjustment) to achieve the needed credit market balance is much more flexible and can avoid an inappropriate permanent tax cut and resulting permanent Policy Budget Deficits.
(back to ref 5)
Note 6
U.S. economic studies have shown that small changes in interest rates tend not to have a very significant effect on business investment decisions -- not nearly as important as an increase in sales. But if the needed small increase in rates causes serious cash-flow or profitability problems for some otherwise viable business firms, it should be possible for the government to provide special temporary subsidized credit to these firms, as in the U.S. "New Deal" of the 1930s.
(back to ref 6)
Note 7
This is much more precise and functionally sound than the traditional Keynesian "fiscal stimulus" approach.
(back to ref 7)
Note 8
To the extent that the present reputed fearful tendency to spend less and save more continues, its effect on the National Credit Balance and interest rates would be automatically offset by further temporary tax reduction and increased Stabilization Deficit.
(back to ref 8)
Note 9
In the U.S., because of unexpectedly favorable economic growth during the late 1980s and early 1990s, the cost of liquidating the failed Savings & Loan Associations was ultimately only about half what was originally projected.
(back to ref 9)
Posted: July 8, 1998
Last revised: April 21, 1999 |
|