Saturday, May 23, 2009


. Saturday, May 23, 2009

The Japanese economy is, er, not doing well. Last quarter, GDP fell at an annualized rate of 15.6%. Exports in the first quarter were down at an annualized rate of 70.1%. That is not a typo, and the report is here [pdf]. Private investment was down at an annualized rate of 49.7%. As The Economist wrote: "If Japan does not hit bottom soon, it may revert to an agrarian feudal economy". Okay, maybe not. But still.

So what does the Japanese government do? Unemployment has increased by 25%, but the unemployment rate is still below 5%. The Japanese achieve this by subsidizing employment, which results in things like metalworkers planting herb gardens. They may as well be digging ditches and then filling them in again. This busywork keeps the official unemployment numbers low, but the labor is not being used productively, so the economy never really recovers. Rigidities in the labor market make things worse: life-time employment is a matter of national obsession, so opportunities for young workers are scarce.

This has been Japan's story for well over a decade now: subsidize employment through round after round of fiscal stimulus (while keeping interest rates low). And what have they gotten? Employment without growth, jobs without opportunities, low unemployment but also low productivity. Add to the mix the continuing existence of zombie banks and the result has been stagnation and deflation.

Any of this sound familiar?

There are many lessons to learn from the Japanese experience. One of them is that Keynesian stimulus may reduce measured unemployment without actually boosting output. That is, the economy may look like it is at full employment, but if the labor is being used unproductively then the wealth of the nation may not increase, and the well-being of the people may not be improved.






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