(identity 'myron)

Thu, 13 Nov 2003

Pork [/Japan]

Mike, of "see you the matrix" fame, has pointed out a really neat economics blog/site at mises.org. It's an interesting site for how completely exhaustive their articles seem to be on the topics they cover. And so, the topic of choice today? *drum-roll* Japan's economy. And yes, I tend to blog about the bad sides of Japan a lot, but this time, it ain't me, it's Mike who brought this up.

Explaining Japan's Recession. I'll admit to not having read the full article yet and skipping to the interesting part it alludes to in the intro: the explanation according to Austrian economic theory.

If the economy is operating on its production possibilities frontier, consumers can consume more and invest less, or invest more and consume less, in the short run. The economy was both consuming and investing more in the late 1980s because the central bank was distorting the interest-rate price signals from consumers to producers. This can only be sustained in the short run while the central bank pursues ever increasing rates of monetary inflation. Once the monetary inflation slows or contracts, the boom abruptly ends and a recession begins. During the recession, the boom's malinvestments are liquidated and consumer time preferences are restored to the structure of production. This began to happen in Japan in 1990. When the central bank stopped the monetary expansion, the stock market dropped, investment dropped, and recession followed--as Austrian business cycle theory predicts.

Now, if you're still with me and haven't run off at the sight of economic terms like PPF, the article continues the analysis and even drops an almost Taoist line, "In Austrian theory, the contraction is necessary to restore balance to the real economy--the preceding expansion is the problem." Continuing on:

In Austrian theory, the recession is necessary, and once it sets in and bad investments are liquidated, the economy will self-correct. After 10 years, there are still no signs of economic correction. Austrian theory recognizes that time is required for economic self-correction but that the correction can only occur if the market process is allowed to work. [...] Japan's government has done everything but leave the economy alone and allow self-correction.

The article then goes on to list the interventionist policies of the Japanese government bailing out companies and propping up an inflated construction industry, that in turn helps assure the LDP's continued political power. The latter, I believe, is exactly what vocal Diet member Tanaka Makiko refers to when she repeatedly says that current politics of the LDP are dragged down by private concerns, and thus they have to be ousted from power (story). Continuing with the economics side of things:

[T]here is one thing the government can do positively [during a depression], however: it can drastically lower its relative role in the economy, slashing its own expenditures and taxes.

And then once more, it goes on to show how the government is doing almost the opposite of exactly that. A good article for a sample of this is "Waste Puts Japan on Road to Nowhere", an article that describes government spending on "roads to nowhere and ghost-town airports". The best? Some of the quotes by the Japanese citizens: "It is among the most stunning examples of pork ever in Japan," said Naoki Inose, head of a committee studying the privatization of Japan's four road-related public corporations.

// posted at 20:12. permalink   comments