Japan Shows the Way: Monetary Easing, Public Works and Promotion of Entrepreneurship

Japan Is a Model, Not a Cautionary Tale

By JOSEPH E. STIGLITZ
New York Times, June 10, 2013

The Great Divideis a series about inequality

In the five years since the financial crisis crippled the American economy, a favorite warning of those who have urged forceful government action, myself included, has been that the United States risked entering a long period of “Japanese-style malaise.” Japan’s two decades of anemic growth, which followed a crash in 1989, have been the quintessential cautionary tale about how not to respond to a financial crisis.

Now, though, Japan is leading the way. The recently elected prime minister, Shinzo Abe, has embarked on a crash course of monetary easing, public works spending and promotion of entrepreneurship and foreign investment to reverse what he has called “a deep loss of confidence.” The new policies look to be a major boon for Japan. And what happens in Japan, which is the world’s third-largest economy and was once seen as America’s fiercest economic rival, will have a big impact in the United States and around the world.

Of course, not everyone is convinced: though Japan reported a robust 3.5 percent annualized growth rate for the first quarter of this year, the stock market has dipped from a five-year high amid doubts about whether “Abenomics” will go far enough. But we shouldn’t read anything into short-term stock fluctuations. Abenomics is, without a doubt, a huge step in the right direction.

To really understand why things look good for Japan requires not only looking closely at Mr. Abe’s platform, but also re-examining the popular narrative of Japanese stagnation. The last two decades are hardly a one-sided story of failure. On the surface, it does look like there’s been sluggish growth. In the first decade of this century, Japan’s economy grew at a measly average annual rate of 0.78 percent from 2000 to 2011, compared with 1.8 percent for the United States.


BUT Japan’s slow growth does not look so bad under close examination. Any serious student of economic performance needs to look not at overall growth, but at growth related to the size of the working age population. Japan’s working age population (ages 15 to 64) shrank 5.5 percent from 2001 to 2010, while the number of Americans of that age increased by 9.2 percent — so we should expect to see slower G.D.P. growth. But even before Abenomics, Japan’s real economic output, per member of the labor force, grew at a faster rate over the first decade of the century than that of the United States, Germany, Britain or Australia.

Still, Japan’s growth is far lower than it was before its crisis, in 1989. From our own recent experience in America, we know the devastating effects of even a short (albeit much deeper) recession: in America, we’ve had soaring inequality (with the top 1 percent securing all of the gains of the “recovery,” and even more income), increased joblessness, and a middle that has been falling farther and farther behind. Japan’s example shows that full recovery doesn’t happen on its own. Luckily for Japan, its government took steps to ensure that the extremes in inequality that happened in the United States weren’t manifest there, and now is finally being proactive about its growth.

And if we broaden the range of metrics we consider, we see that even after two decades of “malaise,” Japan’s performance is far superior to that of the United States.

Consider, for instance, the Gini coefficient, the standard measure of inequality. Zero represents perfect equality, and 1 stands for perfect inequality. While Japan’s Gini coefficient stands today at around 0.33, the number for the United States is 0.38, according to the Organization for Economic Cooperation and Development. (Other data sources put the United States’ level of inequality at even higher levels.) In the United States, the average income of the top 10 percent is 15.9 times that of the bottom 10 percent — compared with 10.7 times for Japan.

The reasons for these differences are political choices, not economic inevitability. Also according to the O.E.C.D., the Gini coefficient before taxes and transfer payments is about the same in the two countries: 0.499 for the United States, and 0.488 for Japan. But the United States does only a little to modulate its inequality, bringing it down to .38. Japan does much more, reducing the Gini coefficient to 0.33.

To be sure, Japan’s situation is not perfect. The country needs to do better in caring for its “older old,” those over 75. This cohort constitutes a growing share of the world’s aging population. In 2008, the O.E.C.D. estimated that 25.4 percent of Japan’s “older old” lived in relative poverty — that is, with incomes less than half the national median — a figure only marginally better than the United States’ (27.4 percent), and far above the O.E.C.D. average of 16.1 percent. While neither we nor Japan may be as rich as we once thought we were, it is unconscionable that such a large fraction of our elderly should face such hardship.

But if Japan has a problem with poverty among the very aged, it does much better on another front, one that has important implications for any country’s future: Some 14.9 percent of Japan’s children are poor, compared to a disheartening 23.1 percent of American children.

Broader measures of performance are equally indicative. Life expectancy at birth (a good measure of the health of the economy) is a world-leading 83.6 years in Japan, versus 78.7 years for Americans. And even this data does not expose the full scope of inequality in life expectancies. It’s been estimated that the longest-living 10th of Americans — who tend to be the wealthiest Americans — live almost as long as the average Japanese person. But our bottom 10th live about as long as the average person in Mexico or Argentina. The United Nations Development Program estimatesthat the effect of inequality on life expectancy in America is nearly twice as strong as it is in Japan.

Other measures also show Japan’s strengths. It is second-highest in the world for attainment of university education, well ahead of the United States. And even in periods of slow growth, Japan has run its economy in a way that has kept a lid on the unemployment rate. During the global financial crisis, the rate peaked at 5.5 percent; in the two decades of its malaise, it never surpassed 5.8 percent. This low unemployment is one of the reasons Japan has fared so much better than the United States.

Those are numbers we now look on with envy. American unemployment, and an overall weak labor market, hurts those in the middle and bottom in four ways.

First, those who lose their jobs obviously suffer — and in America, especially so, because until Obamacare, they overwhelmingly depended on their employers for health insurance. The combination of the loss of a job and an illness sends many Americans to the brink of bankruptcy, or over it. Second, a weak labor market means that even those who have a job are likely to see their hours cut short. The official unemployment rate hides the huge numbers of Americans who have accepted part-time work, not because that’s what they wanted, but because that’s all there was. But even those who are supposed to be working full time see their incomes erode when their hours are cut back. Third, with so many seeking work and not getting it, employers are under no pressure to raise wages; wages do not even keep up with inflation. Real incomes decline — and that’s what’s been happening to most middle-class American families. Finally, public expenditures of all sorts — so important to those in the middle and bottom — are cut back.


WITH his three-pronged approach — structural, monetary and fiscal policies — Mr. Abe, who took office last December, has done what America should have done long ago. Though the structural policies have not been fully fleshed out, they are likely to include measures aimed at increasing labor-force participation, especially among women, and hopefully by facilitating employment for the large number of healthy elderly. Some have suggested encouraging immigration as well. These are areas in which the United States has done well in the past, and are crucial for Japan to address, for the sake of both growth and inequality.

Though Japan has long prioritized equal access to education for women — with a result that Japanese girls score higher in science than boys, and are not as far behind boys in math as American girls are — it still has a relatively low labor-force participation rate for women (49 percent, according to the World Bank, compared with 58 percent for the United States). And an astonishingly small portion of Japanese women — 7 percent, according to one estimate — occupy senior positions in management.

Achieving better labor participation by Japan’s highly educated female population is of course as much a matter of social mores and customs as it is of government policy. And while governments can have only a limited role in changing social mores, they can tilt the playing field — making it easier for woman to participate actively in the labor market through pro-family policies (like pregnancy leaves and child-care facilities) and strongly enforced antidiscrimination laws. National statistics typically assess inequality among households or families — they don’t get into what happens within the family. Yet inequalities within families can be marked, and differ markedly across countries.

Other likely reforms address the fact that Japan, like other advanced industrial countries, needs to go through some major structural transformations — moving from a manufacturing economy to a service-sector economy, and adapting to the dramatic changes in global comparative advantage, to the realities of climate change, and to the challenges of an aging population. While its powerful manufacturing sector has long showed good productivity growth, other sectors have lagged. Japan has the potential to extend its demonstrated innovativeness to the service sector.

With an aging population, increased efficiencies in the health care sector will be crucial; combining its manufacturing and technological prowess with new diagnostic devices is an example of an arena in which it can make global breakthroughs. Investments in research and higher education will help ensure that young Japanese have the skills and mind-set needed to succeed in globalization. Markets don’t make these structural transformations easily on their own. And that’s why government cutbacks in such situations are particularly foolish.

In fact, that is one reason the second pillar of Abenomics, its fiscal stimulus, is so important. Stimulus is needed, as we should have all learned, to increase aggregate demand. But it’s also needed to complete the structural transformation. Investments in infrastructure, research and education promise high dividends. Yet just as deficit hawks blocked stronger action in the United States, critics claim that Japan, with a debt that is more than twice the size of its G.D.P., is not in a position to pursue this critical aspect of the new policies. They point to the fact that Japan’s indebtedness coincides with its long period of low growth. But even here, the data tell a more nuanced story. It is not the debt that caused the slow growth, but the slow growth that caused the deficit. Growth would have been even slower had the government not stimulated the economy.

What’s more, the foundation of austerity advocates’ logic — that high levels of debt-spending always slow growth, anywhere in the world — has been debunked. Europe is providing ever more evidence that austerity breeds austerity, which brings on recession and depression.

The final facet of Abenomics is its monetary policy, which reinforces stimulus with monetary stimulus. We should have learned that monetary stimulus — even strong and unprecedented actions like quantitative easing — has, at most, limited effects. Attention is focused on reversing deflation, which I believe is mainly a concern because it is a symptom of underutilization. While weakening the yen’s exchange rate will make Japanese goods more competitive and thus stimulate the economy’s growth, this is the reality of the international interdependence of monetary policy. It is equally true that the Federal Reserve’s policy of “quantitative easing” weakens the dollar. We can look forward to a day when global coordination improves in this area.


AS the pieces of evidence fall into place, the pressing issue turns out to be not whether Abenomics is a good plan, but how the United States could achieve a similarly integrated plan, and what the consequences would be if it fails. The obstacle is not economic science but, as usual, America’s raging political battles. For example, despite austerity advocates’ dubious intellectual foundation, we have allowed public expenditures to slip in all sorts of areas, including those necessary for ensuring a future of shared prosperity. As a result, even as some states’ financial situations start to edge toward improvement, public employment is still some 500,000 lower than it was before the crisis; the decrease in jobs has occurred almost completely at the state and local level. To regain the pre-recession levels of employment and public services is a tremendous task, to say nothing of bringing them to where they would have been without a recession. (If the economy had been expanding normally, public employment would have increased significantly.) With inequality still high, the burdens are being felt, disproportionately, by our country’s most vulnerable.

A major theme of my research has been that any country pays a high price for its inequality. Societies can have higher growth and more equality — the two are not mutually exclusive. Abenomics has already laid out some policies aimed to produce both. And one hopes that as further details are worked out, that there will be more policies that promote greater gender equality in the labor market will tap into one of that country’s underutilized resources. It will enhance growth, efficiency, and equality. Mr. Abe’s plan also reflects an understanding that monetary policy can only go so far. One needs to have coordinated monetary, fiscal and structural policies.

Those who see Japan’s performance over the last decades as an unmitigated failure have too narrow a conception of economic success. Along many dimensions — greater income equality, longer life expectancy, lower unemployment, greater investments in children’s education and health, and even greater productivity relative to the size of the labor force — Japan has done better than the United States. It may have quite a lot to teach us. If Abenomics is even half as successful as its advocates hope, it will have still more to teach us.

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