The World's 2nd Largest Economy

There are signs of what some call “a collective identity crisis” in Japan. Income disparity, growing numbers of impoverished pensioners and child poverty.

Tough economic times have highlighted the potential of developing nations, China in particular, while Europe is seen as bulky and traditional, struggling to keep up with the Jonses. Japan however is overlooked – still thought to be a victim of its ‘lost decade’ – and now – seen by some – as the setting for a modern portrayal of The Grapes of Wrath. The Economist goes on to say

Hamamatsu, a coastal town south-west of Tokyo, has its share of shattered lives. Workers were laid off right down the supply chain almost as soon as home-town outfits like Yamaha and Suzuki saw export orders slump last year. The lay-offs included many Brazilians of Japanese descent, who had flown to Japan because factories needed cheap, part-time labour rather than expensive Japanese workers on full contracts. The jobless Brazilians live with each other if they cannot pay the rent, and the church provides the neediest with food parcels. At a Catholic church recently, they were making soup to share among those, like themselves, eking out the last of their savings. That included homeless Japanese men, who, unlike the Brazilians, cannot face turning to friends or family for shelter.

Halfway through the feature, I was shocked to read that unemployment in Japan is 5.7%, “low by international standards but a record in Japan.”



Humans perpetually struggle to improve our lot in life – that’s half of the fun in living, at least half the time. When relating to fellow human beings, it’s unfair withhold empathy based on another's lot in life. Afterall, suffering is relative – no matter how bad things are they can always get worse – and suffering is subjective: Its existence cannot be denied.

And yet I could not get this 5.7 figure out of my mind. Unemployment in the US – considered dangerously high – is nearing 10%. The discrepancy points to the relative - perhaps subjective - nature of seemingly objective statistics. There’s a tendency to grasp for numbers as undeniable facts, as stable pieces of evidence which pin us to the ground in an ever shifting world. And used with care they're invaluable.

But consider now the size of this discrepancy – unemployment in the US being around 40% higher than in Japan – next to Japan’s parallel economic struggles and identity crisis: In some ways we are completely different from Japan and yet in other ways very like them. And don’t forget that Japan’s economy remains the second largest in the world.

KJ

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Media (in order of appearance)

Photo: (1)Hamamatsu Castle, 11/12/2008, Pine 57; (2)Poster from 2003 film, Lost in Translation.

Video: (1) Music video, shpytahmon channel, by the Gorillaz of the song "Hong Kong" from their 2007 album D-Sides. Sphere: Related Content

Reagan Revolution 2.0?

Repetition of history is often a given. The question is not so much whether, but how and when. To the latter, our accelerated technology driven world might answer: “Sooner than you think.”

Of particular interest is the similarity between today’s pattern of economic-political events and those of the 1970’s and 80’s: Both involved broad Republican power leading to their by overreach and loss of power; the worst economic collapse since the Great Depression; England's return to conservatism. In the late 1970's, the last event preceded America's return to the Right as well. We've yet to see if the same shoe will drop today.

In 1974 Nixon left office on the heels of the largest political scandal in American history. He left the economy in sharp recession, and although you can’t blame a recession on any one person, his poor economic policy certainly didn’t help. Bitter aftertaste from Watergate allowed the Democratic Party to take charge with Jimmy Carter. The economy continued to slump over Carter’s term, while England grew restless and the conservatives took charge. Thatcher was elected prime minister in 1979, and shortly thereafter Reagan was elected in 1980 – their combination sparking the “Reagan revolution”.

Today’s sequence of events, although not the exact same, shares some uncanny similarities: W Bush left office in 2009 widely unpopular. It was not due to scandal per se, but there was a palpable sense that, similar to what occurred under Nixon, the Republican Party had gained a whole lot of power and under his lead shot itself in the foot, a blow from which it’s still recovering. Similar to Nixon, Bush also left the economy in a state of disrepair; and although you can’t blame a recession on any one person, Bush’s previous policies (particularly on housing) certainly didn’t help.

England is also witnessing a hard and abrupt shift towards Conservatism, one of historic proportion. The immediate cause of this is the expenses scandal, but that can only explain for so much. It is important to view such developments as non-coincidental, particularly in a democracy: Sometimes people need a reason to turn against a party on a dime. Sometimes parties in power become complacent. In following sequence, it is worth asking whether, similar to the late 1970's, England's conservative shift will precede the same in America.

Although one shouldn’t jump to conclusions, it’s difficult not to compare today’s events with those of the 1970’s and ‘80’s. The speculative implication, of course, is that a conservative Reagan-like personality will emerge come next presidential election.

Avoiding such fantastical speculation, the analogy further likens Obama to Carter, a president who is frequently conceptualized as a failed idealist: Perhaps one with the right mind, but in the wrong place at the wrong time to use it to address crisis after crisis.



It is still too soon to judge Obama – and the public, likewise, is giving him his due time to perform. But emerging recently – and well written in a series of Economist articles focusing on areas in which his efforts have been stifled by poor execution and lack of detail and foresight – is a lingering suspicion that Obama will leave the country in no better shape than when he entered office.

This seed of lingering suspicion grows much bigger in light of the soaring popularity with which he entered office, particularly among young people. Such a failure should it occur would be seen as widely symbolic as his election. And such a failure should it occur would no doubt leave the Oval Office wide open for a rising Republican star (perhaps along the likes of Bobby Jindal).

At present Obama’s legacy remains to be written in stone. But time is running out. Much of it will rest on his performance over this upcoming year: “Crunch Time” as The Economist puts it. In the meanwhile Americans continue to hold their breath.

Judging from output alone, it took over 10 years for the US economy to return to pre-1974 levels. These sorts of recessions have a way of working themselves out but only in the very long run. Such is often the time required for an economy to unwind and reposition itself, a process which arguably took the whole of Reagan’s first presidential term. That the rate of job and capital loss will slow down is a given, but it’s very unlikely that we’ll see the economy prop itself back up over the next few years. The speculative implication is that the recovery won’t begin until at least the next presidential term.

The worst of the crisis is likely over. And yet we still find ourselves at a crossroads with little indication of where we might be heading. Only history will be able to tell us if we’ve been here before.


-KJ
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Media (in order of appearance)

Photo: (1)Richard Nixon; (2)Jimmy Carter; (3)Ronald Reagan; (4)The Economist, April 1st 2009 Cover; (5)Hazy Trees, Katwingz20.

Video: (1)Carter Crisis in Confidence Excerpt from 1979 speech, 11/11/2008, metbans. Sphere: Related Content

Turbulence

The Age of Turbulence abruptly begins with Alan Greenspan on a flight across the Atlantic. The captain brings him up front and tells him that the World Trade Towers were hit, and the plane had been redirected back to Zurich. It was 9/11, and he recalls his racing thoughts about what this would mean for the new world. Second to his wife, his obvious concern was for the economy. It was clear that the terrorists weren’t directly after the financial system, or else they would’ve hit the banks, but everyone knows that a sound economy abhors such instability.

“The mood in the cockpit was somber,” writes Greenspan. “’You’ll never believe this,’ the captain said, ‘Listen.’ I put my ear to the headset but couldn’t hear anything other than static. ‘Normally the North Atlantic is full of radio chatter,’ he explained. ‘This silence is eerie.’ Apparently nobody was out there.”

Greenspan recalls the likewise eerie aura on Capital Hill over the next year. Everybody kept insisting that America was safe and her citizens should stay calm, but there was no concrete evidence for this; and in contrast to their words, it looked like White House officials were bracing for a second large-scale attack, as if it was more of a question of when, instead of whether, it would happen.

Amidst the chaos and the aftermath, however, Greenspan was rather surprised about how the economy managed to get itself right back onto its feet. While it did involve some minor tinkering with air-travel and communications, for the most part, business as normal resumed rather soundly.

The lesson that Greenspan took away was that it reflected the rigidity of the economy. 9/11 left a political and social gash on the country, but from the eyes of the economy, it was just a blip on the radar. For Greenspan 9/11 was a testament to the strength and independence of the US economy.

It borders on irony that less than a year after publishing his monumental autobiography – 544 pages long, and with an $8.5 million advance from Penguin Press – his book is already outdated, with the banking system on the brink of failure and the US potentially facing the worst depression since the 1930's. Indeed, the economy is sound and it is rigid. But it seems to be a beast onto itself - strong enough to bear external blows as heavy as 9/11, while anything but immune to its own internal writhing and convulsions.

The Blame Game

Jim Cramer recently had a comedic, and quite frankly shameful, run-in with Jon Stewart, in which Cramer blamed his interviewees for lying to him. No doubt the blame game has just begun.

Bernanke, Greenspan’s successor, recently came out with his most emotional statement yet, in part blaming AIG’s irresponsible risk-taking for the collapse.

“If there’s a single episode in this entire 18 months that has made me more angry, I can’t think of one, than AIG,” he said. “AIG exploited a huge gap in the regulatory system. There was no oversight of the financial products division. This was a hedge fund, basically, that was attached to a large and stable insurance company, made huge numbers of irresponsible bets, took huge losses. There was no regulatory oversight because there was a gap in the system.”

Of course what Bernanke partly overlooks is expanding credit in the economy – largely through the rise of credit default swaps – which AIG was in part responsible for backing up. Credit-expansion during a boom is one thing, but similar to investment banking it crumbles when the economy falters in the least. Merrill Lynch and Bear Stearns can blame their falls on the stock market; creditors can blame their problems on the lack of funds to repay debts; and Bernanke can blame it all on those who were responsible for backing the expansion of credit. But what’s shortsighted is a thorough examination of the system in and of itself.

Communism, after all, would work perfectly if only the laborers worked hard. Yet blaming the fall of communism on laborers' laziness is futile, because they’re not working for a reason: No incentives.

Every society has its screw-ups. Shit happens as Forest Gump might say. But society banks on the fact that these screw-ups remain small in number and are randomly dispersed. When their numbers grow and their mistakes become more apparent, then you have to start looking for other answers. In other words, you have to dig deeper when shit starts happening in a frequent and consistent manner.

Which is why the notion of an "insurance" company that backs credit defaults is absurd, because the frequency of credit shit happening is non-random and inter-dependent. Other types of insurance depend on the fact that the covered averse events occur randomly and independently. If all of GEICO's customers, for instance, crashed their car on the same day, then it would surely go out of business, but that's not how car crashes work. However, such is how the credit business works, with one default often linked to another in a chain of events, having a similar effect as a massive car collision pile-up spanning the entire country would have on GEICO. Third parties can't feasibly "insure" credit contracts; you can't hedge the risk of credit defaults with successful creditors, because both events are tied to eachother. That's also why Bernanke's anger towards AIG is misdirected.

Indeed, AIG acted irresponsibly, but why were they in a linchpin position to aid in the collapse of the entire economy? Where were the corrective forces that should’ve come into play?

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Depression Economics

Murray Rothbard’s America’s Great Depression (which I’ve just started) opens with a similar point regarding business cycles and failures: Just like screw-ups and bad-apples, they’re seen throughout society. What’s rare is when a nation experiences a string of failures – each tied to the other – and the economy as a whole (rather than any particular company) lacks the corrective forces to get back on track. The Great Depression, similar to current times, has been blamed on various individual enterprises, such as Galbraith’s 200-page rant against speculators of the 1920’s, or the accelerative properties of the capital goods sector. But these explanations ring hallow insofar as they’re always present, and, if true, are relatively non-specific to a particular time period.

Rothbard continues that the largest tragedy of the Great Depression wasn’t the pain forced upon the nation, but the dearth of literature explaining it. Most commentators on the subject agree. Indeed previously the country had seen various mini-crises, but they proved to be self-correcting within a year or two. The Great Depression was shocking, not because of the panic of 1929, but because of the huge length of time it took to be resolved.

Part of the dearth of study, Rothbard contends, is because few theories account for the business cycle. Recessions are conceptualized as the exception rather than the rule, and when they last for more than a few years, this is generally true. But that’s no reason to shy away from studying them. Insight can be gleaned from them, similar to an extreme medical case. Phinneas Gage – the railroad worker who had his frontal lobes shot through with an iron spike – was also the exception, but it was the extreme and curious nature of his state that kick started modern brain science as we know it today. Advances in neuroscience have only increased our understanding of Gage’s case, even a century and a half after the event. Such aberrations have proved invaluable to neuroscience and to medical science as a whole; and likewise economic aberrations should be a natural starting point for inquiry into economic theory. Unfortunately, the later is rarely the case, and we may have to wait much longer to understand current economic events.

-KJ

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Media (in order of appearance)

Photo: (1)Greenspan, 09/15/2007, by chickenhawkdown; (2)President George W. Bush address to the nation and joint session of Congress Sept. 20; (3) Plane, 02/20/2007, by ores2k; (4) Cover of Greenspan's 2007 book, The Age of Turbulence; (5) Ben Bernanke, 03/06/2006, by Simon; (6) Mad Money, 08/16/2007, by Carlos Gomez; (7) Murray Newton Rothbard, 02/01/2009, by Taylor; (8)Phineas Gage (Lesioni), 09/28/2008, by epanto.

Video: (1) Daily Show interview with Jim Cramer, of CNBC's Mad Money, 03/13/2009. Sphere: Related Content