The Economic Fallacy of ‘Zombie’ Japan

Japan has been getting a raw deal from the so-called economic experts. Consider this: in the midst of the great recession, the United States is suffering through nearly 10% unemployment, rising inequality and poverty, 47 million people without health insurance, declining retirement prospects for the middle class and a general increase in economic insecurity. Various European nations also are having their difficulties, and no one knows if China is the next bubble due to explode.

How, then, should we regard a country that has 5% unemployment, the lowest income inequality, healthcare for all its people and is one of the world’s leading exporters? This country also scores high on life expectancy, low on infant mortality, is at the top in numeracy and literacy, and is low on crime, incarceration, homicides, mental illness and drug abuse. It also has a low rate of carbon emissions, doing its part to reduce global warming. In all these categories, this particular country beats both the US and China by a country mile.

Doesn’t that sound like a country from which Americans and others might learn a thing or two about how to get out of the hole in which we’re stuck?

Not if that place is Japan. During and before the current economic crisis, few countries have been vilified as an economic basket case so much as Japan: it’s been hard to find any reference to the country without some mention of its allegedly sclerotic economy, its zombie banks, its deflation and slow economic growth. This malaise has even been called “Japan syndrome“, sounding like a disease to warn policymakers, as in “you don’t want to end up like Japan.”

No one has been more influential in defining this narrative than Nobel Prize-winning economist Paul Krugman. Throughout the 1990s, and still today, Krugman has skewered Japan’s economy and leaders. In the late 1990s, Krugman wrote a series of gloom-and-doom articles, complete with equations and titles like “Japan’s Trap” and “Setting Sun”, bluntly stating:

“The state of Japan is a scandal, an outrage, a reproach … operating far below its productive capacity, simply because its consumers and investors do not spend enough.”

But let’s look at some of the Japanese metrics during that time. Throughout the 1990s, the Japanese unemployment rate was – ready for this? – about 3%, half the US unemployment rate at the time. During that allegedly “lost decade”, Japan also had universal healthcare, less inequality, the highest life expectancy, low infant mortality and low rates of crime and incarceration. Americans should be so lucky as to experience a Japanese-style lost decade.

Reopening the case of Japan raises some important questions. How do economists such as Krugman decide what to value and prioritise, or what to measure? What is an economy for? To produce the prosperity, security and services that people need? Or to satisfy economists and their equations, theories and models?

In the current debate over fiscal stimulus versus deficit reduction for economic recovery, various economists now are criticising Germany. Krugman has written that the Germans “seem to be getting their talking points from the collected speeches of Herbert Hoover”. Krugman, a stimulus hawk, is criticising Germany for the same thing for which he has criticised Japan – not spending, or consuming, enough to stimulate its economy.

Yet, in the early 1990s, when the US was plagued by large deficits and recession, the Clinton administration didn’t employ Krugman-type fiscal stimulus. Instead, it cut the deficit. By the end of the decade, the US budget showed a sizable surplus and the economy was booming.

Japan’s economy has been and remains successful. So is Germany’s. They have reached an economic steady state in which they don’t need roaring growth rates to provide for their people. But for the economic Cassandras, apparently, it doesn’t matter if people’s needs are being met; what matters is whether their theories and equations balance.

Unfortunately, there is a common sense aspect to this that gets lost amid the rhetoric. Two lessons of our times are that economic bubbles eventually burst, and that the environmental consequences of unbridled growth in this age of global warming are severe. In other words, the real game is no longer strictly about economic growth; it’s about sustainability and learning to do more with less. The era of US-style trickle-down economies is over for wealthy countries because trickle-down is neither economically sound nor ecologically sustainable. The developed nations must lead the way towards a different path of development.

This is not an easy challenge, yet it is the course that Japan and Germany have chosen. Americans would be wise to learn from them. If the US didn’t have such a trickle-down economy that has produced so much inequality – if it was, in fact, better at sharing its wealth – perhaps it wouldn’t need so much fiscal stimulus and growth.

Steven Hill

New America Foundation

Steven Hill has recently published Europe’s Promise: Why the European Way is the Best Hope in an Insecure Age

Originally published in The Guardian. Republished with the author’s permission.

Published by the LA Progressive on August 30, 2010
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About Steven Hill

Steven Hill is Director of the Political Reform Program at the New America Foundation, which seeks to identify and develop the best opportunities for political and electoral reform, educate opinion leaders and the public about electoral alternatives, and encourage the formation of a broad-based coalition for reform. Mr. Hill is the former senior analyst and cofounder of the Center for Voting and Democracy/FairVote. He is author of the recently published Ten Steps to Repair American Democracy (PoliPoint Press, May 2006). His previous books include Fixing Elections: The Failure of America's Winner Take All Politics (Routledge Press, 2002) and Whose Vote Counts (co-author, Beacon Press, 2001). Mr. Hill's articles and commentaries have appeared in The New York Times, The Washington Post, Los Angeles Times, The Wall Street Journal, Christian Science Monitor, The San Francisco Chronicle, The Chicago Tribune, Houston Chronicle, and other leading publications. Mr. Hill has appeared on national and local radio and television programs, and has lectured widely in the United States and Europe. He was campaign manager in San Francisco for the successful effort that passed instant runoff voting for electing local offices, and was one of the organizers of successful efforts to pass public financing of elections for local campaigns. Mr. Hill received a B.A. from Yale University.