How the World Works, Redux

Michael Pettis has written "A brief history of the Chinese growth model" which reads quite a lot like James Fallows classic 1993 essay on Japan's growth model, "How the World Works". Pettis hits many of the same notes: it isn't new, it was advocated for by Alexander Hamilton in the US and Friedrich List in Japan Germany; it is focused on enhancing national capabilities as much as improving the actual standards of living of citizens; to that end it prioritizes investment and exports over consumption and imports. There are other similarities as well.

Anyway, I know that Fallows' essay gets assigned in undergrad IPE classes a lot. This could be an interesting/useful update or companion piece.

In other (related?) news, here's a right-up-to-date essay on the economic situation in China from Caixin (sort of a Financial Times of China). It's not very optimistic; the title is "Waiting for a Crisis".

FWIW, Fallows' article on Japan appeared about a year before that country's financial crisis in 1994.

There Is No Technocracy: Bank of Japan Edition

From the Telegraph:

"Its very rare for monetary policy to be the focus of an election. We campaigned on the need to beat deflation, and our argument has won strong support. I hope the Bank of Japan accepts the results and takes an appropriate decision," he said.

The menace behind his words did not have to be spelled out. He has already threatened to change the Bank of Japan’s governing law if it refuses to comply.

Political economists have not done a very good job of analyzing the political role of central banks and other "technocratic" institutions. We've spent most of our time looking for central bank independence how that conditions inflation outcomes, with a bias in favor of low inflation. But central bankers respond to the political environment in which they operate, have preferences of their own, and should therefore be treated as political actors.

Via Scott Sumner, who also notes:

In 2001 Argentine fans of the “currency board” learned that their policy regime was not as impregnable as they’d assumed. And in 1933 American supporters of the gold standard found that even the world’s largest monetary gold stock couldn’t prevent a devaluation under duress. The reason was the same in both cases—voters get the last word.  

On the 1930s see Beth Simmons, who persuasively argues that differences in political regimes conditioned choice of policies during the Depression. On Argentina I like Paul Blustein's account, which is journalism (not social science) but there's more real social science in it than many academic books.

There Is No Technocracy, Bank of Japan Edition

Scott Sumner:

My view (and that of many other market monetarists) is that the Bank of Japan acted as if it didn’t want inflation, tightening policy in 2000 and 2006, despite no inflation. In my view the press and many economists were somewhat naive in accepting the BOJ’s claim that there was little they could do to end deflation. After all, the yen is a floating fiat currency. ... 

I used to wonder why the BOJ tightened so much in late 2006, raising interest rates and reducing the monetary base by 20%. Another Financial Times story gives us the answer: 

In recent years, the bank has tended to shrug off overt political pressure. A 1998 revision of the BoJ law strengthened its operational autonomy by removing the government’s authority to dismiss the governor and deputy chiefs.  

Only under prime ministers with very solid popular support, such as Junichiro Koizumi between 2001 and 2006, has the BoJ appeared to bend to the government’s will. It has put up a particularly strong defence of its independence under Mr Shirakawa, promoted from deputy governor in 2008.

This is a common theme on this blog. Hopefully others are starting to internalize it. For some reason this particular post and discussion reminded me of this old article (pdf) of Oatley's on the politics of central banks. For my money the best articles on the politics of "technocratic" institutions have yet to be written. There's a good bit of fruit still to be harvested from there.

Score One for the Oatley "Maybe No Big Deal" View

See this Krugman post on Japan's 2002 downgrade.

Hegemoaning

Dan Nexon, I think, closes the argument that I'd had with Quiggin a few weeks back:

Consider that the United States is currently engaged in two major military operations and yet it has significant forces converging on the Libyan coast and on Japan. Puts John Quiggin's insistence that the US is now one of a number of major powers into perspective, but not necessary in a way that speaks well of current US budget priorities.

Aside from the that I'm not quite sure what the last clause means, this is exactly right. The US, half a world away from both Libya and Japan, is both closer and more able to intervene in both places than the other significant powers in Western/Southern Europe or Asia are to intervene in either. And is able to intervene in variable ways.

FOTD

China is building its first aircraft carrier. As Yglesias says:

News that China may be in the midst of building its first aircraft carrier is a reminder both of China’s rising geopolitical clout and also the reminder that they remain quite a bit behind us.

"Quite a bit" is an understatement, of course.

Yglesias also points to this very good article by Rob Farley on why a U.S.-Japan-India coalition to balance against China may not be a good thing, even if its inevitable. It's gated for non-subscribers, but those with institutional IDs (i.e. students) should be able to get access.

Balancing Act

Just to piggy-back off of Dr. Oatley's post below. Geithner wants to cap current account surpluses or deficits at 4% of GDP. What effect would that have? Well, U.S. GDP is roughly $14tn. 4% of that is $560bn. In other words, a persistent 4% deficit in the current account is still quite large. Large enough that during most periods the U.S. was well within that boundary, though not during the mid-2000s. As the picture above shows, only in the last few years has the U.S.'s balance of payments been that sharply out of balance. (Note: that is nominal yearly data.)

What's interesting to me about the G20 kicking around these types of proposals are the distributional implications:

Representatives of the world’s largest economies, meeting in South Korea, reached tentative agreement early Saturday on the need to rein in trade imbalances, as part of an American-brokered compromise on calming exchange-rate tensions that have threatened to disrupt the uneven global recovery.

The Obama administration on Friday urged the other economic powers that make up the Group of 20 to agree to curb persistent surpluses and deficits that could contribute to the next financial crisis.

The proposal, which included a numerical limit, was backed by South Korea and quickly drew support from Britain, Canada and Australia. But it met with resistance from Germany and ambivalence from Japan, both major export countries. China, whose currency battle with the United States has threatened to derail the process of global economic cooperation, did not formally weigh in.

So after a marathon negotiating session that stretched into the predawn hours Saturday, the G-20 representatives agreed on the goal of “reducing excessive imbalances” — without a specified limit — and called on the International Monetary Fund to examine the causes of “persistently large imbalances.” The draft statement, to be ratified later Saturday, will also call on countries to “refrain from competitive devaluation” of their currencies, officials said. ...

Four countries have current-account surpluses exceeding 4 percent: Saudi Arabia (6.7 percent), Germany (6.1 percent), China (4.7 percent) and Russia (4.7 percent.) But under the American proposal, countries like Russia and Saudi Arabia that are “structurally large exporters of raw materials” would be exempt from the 4 percent limit, so the pressure would have fallen on China and Germany.

Two G-20 countries have current-account deficits larger than 4 percent: Turkey (5.2 percent) and South Africa (4.3 percent). The United States is next, at 3.2 percent.

A lot of stuff in here. First note that, once again, the expansion of the G7 to the G20 seems to have made it practically impossible to reach meaningful agreements with actionable language. How to reduce these imbalances? Umm... How much should they be reduced? No hard limit. What is the consequence of not reducing imbalances? None that I can see.

Of course the most important thing is who is reducing imbalances. As Dr. Oatley noted, it doesn't matter what countries like Turkey and South Africa do. Nor Russia or Saudi Arabia. It only matters what the U.S., China, and Germany do. The U.S. is under the proposed 4% limit, so is it any surprise that that is the level Geithner picked? It's the number that directly targets China and Germany, and to a lesser-extent Japan. The U.S. is trying to make China, Germany, and Japan pay for international macroeconomic adjustment. No wonder that those countries immediately rejected a firm requirement.

Meanwhile, Justin Fox notes that Keynes proposed something very similar during the Bretton Woods discussions:

Not impossible-to-enforce targets, but a system with incentives built in that would have made big trade imbalances unattractive to both sides. There’s that little matter of creating a new global currency and getting everybody to accept it, but this was at the tail end of World War II. If the U.S. had decreed that the International Clearing Union was a go, the International Clearing Union would have been a go. But at the time, the U.S. ran big trade surpluses and assumed it would do so forever. Its delegates at the Bretton Woods meetings were vehemently opposed. So the idea went nowhere.

Imagine that! Powerful governments decided not to pursue actions that went against their domestic interests. Who could have foreseen it?

The same dynamics are still at play even if some of the roles have reversed, so asking the IMF to investigate causes is a waste of time. China, Germany, and Japan have strong domestic political incentives to pursue policies that generate large current account surpluses. Their political survival depends on continued economic growth, and their economies are so structured that growth has to come largely from exports. The IMF will surely highlight the policies that lead to these outcomes, including exchange rate machinations, but it won't matter because they won't address the underlying political processes that generate the policies in the first place. Even if leaders wanted to bite the bullet and reverse these policies, their domestic constituents wouldn't allow it.

If the U.S. wants to address this issue, it's going to take much more than a vaguely-worded G20 communique. It will have to build a large constituency of other large economies. It will have to find a way to appease Germany and Japan while isolating China. It will have to massively boost domestic savings. And it will have to push a binding agreement through the IMF or WTO. That's a very tall order right now, and I don't see how they can pull it off. As the NYT article linked above notes:

Desmond Lachman, a former I.M.F. official now at the American Enterprise Institute in Washington, praised Mr. Geithner’s message. “It’s a constructive and imaginative proposal and it broadens the discussion away from an exclusive focus on currency to the wider set of policies needed to bring balance about,” he said. “But if you don’t have the Germans and the Chinese, this isn’t going to go very far.”

He added: “They want the U.S. to reduce its deficits, but they don’t want to reduce their surpluses.”

And vice versa.

Politics Everywhere, Even Where It's Supposedly Not Allowed (Reprise)

Variations on a theme, I guess:

All foreign relations have, it seems, now been made subservient to domestic concerns.

That statement was not made (primarily) about the U.S., but rather about China, North Korea, Myanmar, the Philippines, Vietnam, and Taiwan. None of which are paragons of democracy; all of which must maintain tight domestic coalitions to remain in power.

The rest of the op-ed is very interesting, and concerns the U.S. relationship with Southeast and East Asia, Sec. Clinton flexing her muscles, U.S. diplomacy towards South Korea and Indonesia (both of which are of large importance, in my view), and -- if you want to view it that way -- signs of balancing maneuvers to restrict potential regional hegemonies.

Your grain of salt: It was written by Yuriko Koike, an opposition member of the Japanese government, and former Minister of Defense and National Security Advisor. Of course, the current Japanese government is the first in decades to displace the America-friendly Liberal Democratic Party, of which Koike was (presumably) a member. I'm not well-versed enough in Japanese politics to know whether or how much that fact obscures the analysis. Perhaps a reader can enlighten?

Awesome

Secrets of the Tokyo underground, from the always-excellent Pink Tentacle.

ASEAN: More Like NAFTA or EU?

The Association of Southeast Asian Nations (ASEAN) met last week in Thailand to continue work on Asian economic integration. They continued lowering tariffs and expanding investment into each other's countries. Meanwhile, China and Japan jockeyed for position as the leading power in Asia.

There are several proposals for a future East Asian free-trade zone — the Japanese version is called the East Asian Community — but all are vague, and leaders say they are a long way from reality.

The proposals are often compared to a European Union-style single market, but analysts say a pan-Asian economic bloc would be unlikely to have open borders, free movement of labor and common security policies.

China did not publicly offer its vision of an East Asian community, but a statement issued after a meeting of what is known as Asean plus three — the leaders of Asean, China, Japan and South Korea — said those 13 countries would form the “main vehicle toward the long-term goal of building an East Asian Community.” That would seem to exclude a role for the United States.

Japan still wants the U.S. to be involved. (Unlike Emmanuel ASEAN isn't my area of expertise, but I have a feeling that China wins this battle for regional influence. That doesn't mean that the U.S./Japan go away completely -- we're too big to ignore -- but it does mean a greater role for Beijing in maintenance of the Asian economy. In my view, this isn't necessarily a bad thing for the U.S.)

I'm not surprised that ASEAN will stay away from labor and security arrangements. These policies have been controversial in Europe, which is much richer, less competitive, and more ideologically similar than SE Asia. Most of these countries still have tons of unemployment, so it would be politically impossible to have open labor markets. And could you imagine Japan and China agreeing on a security arrangement? China and S. Korea? Burma and Singapore? Me either.

So it's unlikely that we'll see E.U.-style integration in Asia any time soon. But that doesn't mean that NAFTA-style trade and investment arrangements wouldn't be beneficial.

More on Japan's Health Care System

As the U.S. debates health care reform, I've been interested in comparative looks at other systems. A few weeks ago I wrote about Japan's health care system, which is very inexpensive and also has very good outcomes, and one way that they keep costs low: they pay doctors very little relative to the U.S. Toward the end of that post I mentioned that even with low doctor salaries demographic shifts will make it difficult for Japan to hold down expenses over the medium run. A recent WaPo article highlighted the same thing:

Half a world away from the U.S. health-care debate, Japan has a system that costs half as much and often achieves better medical outcomes than its American counterpart. It does so by banning insurance company profits, limiting doctor fees and accepting shortcomings in care that many well-insured Americans would find intolerable.

The Japanese visit a doctor nearly 14 times a year, more than four times as often as Americans. They can choose any primary care physician or specialist they want, and surveys show they are almost always seen on the day they want. All that medical care helps keep the Japanese alive longer than any other people on Earth while fostering one of the world's lowest infant mortality rates.

Health care in Japan -- a hybrid system funded by job-based insurance premiums and taxes -- is universal and mandatory, and consumes about 8 percent of the nation's gross domestic product, half as much as in the United States. Unlike in the U.S. system, no one is denied coverage because of a preexisting condition or goes bankrupt because a family member gets sick.

But many health-care economists say Japan's low-cost system is probably not sustainable without significant change. Japan already has the world's oldest population; by 2050, 40 percent will be 65 or older. The disease mix is becoming more expensive to treat, as rates of cancer, stroke and Alzheimer's disease steadily increase. Demand for medical care will triple in the next 25 years, according to a recent analysis by McKinsey & Co., a consulting firm.

If current trends hold, Japan's health care costs will be equal to the U.S.'s within a decade, and that's even if they keep doctor's salaries down. But shortages of doctors are getting worse, particularly for specialists, and average wait times are getting longer. Quality of service is declining as costs are increasing. It's not a good mix, and the Japanese system is beginning to look as unsustainable as the U.S.'s system.

The whole article is worth reading.

What the Recent Japan Election Means

Not my area of expertise, so I'll out-source. James Fallows comments and points to Karel van Wolferen's detailed analysis.

It could be a paradigm shift. Or not. But if the election does represent a new direction for Japan it should not be taken lightly. As Walt says:

After all, Japan is still the world's second largest economy. Its military spending ranks fifth in the world. It has a highly educated populations and many advanced industries and scientific establishments (including the potential to get nuclear weapons very quickly if it wished). It is the location of several key U.S. military bases, and is bound to Washington by a long-standing security treaty.

All this means that if Japanese economic and foreign policy were to change significantly, the effects would be quite far-reaching. I'm not saying they will, but I am planning to spend a bit more time keeping an eye on events there.

Me too.

A Comparative Look at Japanese Health Care

The NY Times interviews U. of Michigan political scientist John Creighton Campbell, a comparativist who specializes on Japan and its health care system. The Japanese are some of the healthiest, longest-living people on the planet, and Campbell acknowledges upfront that this is largely due to lifestyle factors like diet and lower rates of violent crime. But they do have a very low-cost, universal health care system. How do they manage it, and what can the U.S. learn from it?

Reimbursement rates to doctors and hospitals are negotiated and set every two years. The fees are quite low, often one-third to one-half of prices in the United States. Relatively speaking, primary care is more profitable than highly specialized care, so Japanese doctors face different incentives than U.S. doctors. As a result, the Japanese are three times more likely than Americans to go to the doctor, but they receive many fewer surgical operations.

Slashing the pay of doctors is not feasible in the current U.S. political climate, but that's a large reason why we'll always have significantly higher costs than France, the U.K., and Japan. Even if we could control costs by limiting doctors' pay, it may not be desirable. Low pay for doctors and emphasis on primary care has led to shortages:

Financial stringency and organizational rigidities have led to inadequate hospital services in some areas, particularly in emergency care, where patients in ambulances are sometimes turned away. There also are doctor shortages in some regions and specialties. Consultation times can be too short for complicated diagnoses and for psychotherapy. ...

Many of the problems are largely due to underinvestment, and the severity of the cost control has become an issue in the current election campaign.

Several Los Angeles hospitals drew plenty of ire for dumping poor patients on the streets a few years back, and they deserved all of it. But would it have been better if the patients had not been admitted in the first place? Or if there are no specialists to see them at all? I'm sure this is not widespread practice in Japan; then again, it's not widespread in Los Angeles either. Strangely, Campbell doesn't see see this as rationing:

In the 1980s, health care spending was increasing as quickly in Japan as in America, but the Japanese government learned how to influence medical care provision without rationing by manipulating how it paid for services. Annual spending growth has thus been quite low despite a rapidly aging population.

Creating a shortage of doctors by limiting their pay is most certainly rationing. Of course, in the U.S. we ration in the other direction -- if you or your insurance company can pay for it, you get it; if not, good luck -- but not for emergency care. That's pretty much the only part of the U.S. health care system with more-or-less universal access (excepting some homeless in L.A., of course). This may not be as bad as it sounds, since it's likely true that Japan needs less emergency care than the U.S. due to aforementioned lifestyle factors, but it does sound bad.

Still, Japan has a lot going for it and the problems in the system could be lessened to some extent by increased funding. This may be more difficult as the population continues to age, but right now Japan spends less per capita on health care than almost any other industrialized country. Interestingly, their system is not single-payer (except for the elderly, as in the U.S. currently): private insurance covers most people, but is strictly regulated. Health care premiums are paid for via a progressive tax. It sounds like Japan has mandates for purchasing coverage but no public option, although Campbell doesn't speak directly to those points.

In short, Japan shows one way to bend the cost curve: pay doctors less, and accept the shortages that follow. It might work well enough in a country with such healthy lifestyles, but I have a feeling that that would be a recipe for disaster in the U.S. Which is probably why you seldom hear American health care reformers citing Japan as a possible model for the U.S., despite the low costs.

U.S. Loses W.T.O. Dumping Appeal

This is positive:

The World Trade Organization’s top court rejected on Tuesday an American appeal in a long-running case on antidumping measures, clearing the way for Japan to threaten trade sanctions against Washington.

The final ruling by the Appellate Body of the W.T.O. in the case, which Japan started in 2004, dealt another setback to a controversial American method of dealing with unfairly priced imports.

But it also highlighted sensitivity about antidumping measures. The measures impose additional duties on imports that are sold for less abroad than they cost at home, but can be abused for protectionist purposes. ...

The case turned on a controversial method known as “zeroing” used by the United States to calculate duties on goods imported for less than they cost in the originating country.

The way the United States handles its antidumping measures was also at issue. Washington argued that it could continue to levy duties on goods that entered the country before a W.T.O. ruling finding such duties illegal — a stance rejected by the court.

The United States is the only one of the W.T.O.’s 153 members to back zeroing, which the Appellate Body has ruled against consistently.

The U.S. is clearly in the wrong here, and I'm happy to see the W.T.O. put its foot down. I discussed how anti-dumping protections often make trade less free and fair before.

China, 17th-Century Mercantilists, Space Exploration, and Population Control

Via Brad DeLong, I see that Martin Hutchinson has been digging in dusty parts of the library:

China's recent announcement that it would use its US$2 trillion of foreign reserves to boost its companies' overseas acquisitions tells us that its economic beliefs are neither those of Adam Smith, nor of Karl Marx, but of the 17th century mercantilist Thomas Mun. It is becoming clear that in economics, unlike in "hard" sciences, old belief systems never die.

Mun (1571-1641) wrote a classic magnum opus England's Treasure by Foreign Trade. Published only after his death in 1664, it was nevertheless very influential. Mun had been a director of the East India Company, and, unlike earlier theorists, believed that foreign trade was beneficial. However, he didn't hold with any high-faluting nonsense like comparative advantage or maximization of global economic welfare. For Mun, the purpose of foreign trade was to export more than you imported and, consequently, amass a huge store of foreign "Treasure," whichyou could then use to found colonies that would take control of natural resources.

To further this objective, countries should: cut back domestic consumption as far as possible; increase the use of land and other domestic resources to reduce imports; encourage the export of goods made with foreign raw materials; and export goods with price-inelastic demand because profits would be greater.

Okay, let's read not read too much into things, but clearly the Chinese growth model has a mercantilist element. So far, fair enough. But then Hutchinson goes off the deep end. He argues that the only two ways around this model are: a). Start extracting natural resources from Mars; b). Cull the human population by 6 billion or so to get back to the 1 billion that were alive in Adam Smith's day. I'm not exaggerating here. Hutchinson clearly claims that those are the only two possible outcomes. Here's his conclusion:

Returning to a global population of 1 billion would be difficult, but it may be more practicable than a gigantic interstellar exploration program. If so, it may form the only viable exit from the inexorable approach of the world of Thomas Mun.

Wha? Difficult? Some understatement. And I didn't realize that the concept of comparative advantage had a population limit.

On a quasi-related note, Hutchinson's invocation of Mun w/r/t China reminded me of James Fallows' 1993 invocation of Friedrich List w/r/t Japan. Fallows' piece is a much better article, but the general point is the shockingly similar: an Asian economy rises to power by eschewing the Smith/Ricardo model in favor of some other oft-forgotten political economist from yesteryear. In Fallows' case, it was List, a 19th-century German-born mercantilist who had some ideas in common with Alexander Hamilton.

I think Hutchinson and Fallows both over-state their cases that Japan and China are well-modeled by List or Mun, but at least Fallows isn't arguing in favor of intergalactic mining, or the "difficult" task of getting rid of 6 billion people.

Was I Wrong to Be Worried About Deflation?

Last fall Dr. Oatley told me not to freak out about deflation as price indices fell despite the fact the Fed had dropped interest rates practically to zero. Since that time the Fed has engaged in unprecedented "quantitative easing" policies while keeping interest rates near the zero bound. Thankfully these actions, along with the bailouts and stimulus policies of the Bush and Obama Treasury Departments, have kept the American economy out of a deflationary spiral. The most recent data show a core CPI inflation rate (excluding energy and food prices) in the black.

So was I overreacting? I don't think so. For one thing it was not clear back in November that the Fed would engage in quantitative easing, or that those actions would have much traction. It also was not yet clear how long the credit crisis would persist, what actions the Treasury Department would take, or what effect a stimulus bill that was still months away would have. In fact, some of those questions are still unanswered.

But one thing is clear. The ECB and Bank of Japan adopted less drastic monetary and fiscal policies than the U.S., and the result has been record-setting falls in their price levels. They are still not in end-of-the-world territory yet (especially in Europe), but they are firmly in the danger zone. As Dr. Oatley wrote back in November, this is cause for concern for following reasons:

1. Debtors suffer as the real value of their debt rises. Hence, more difficulties to service loans (think about housing price collapses and mortgage foreclosures). Rising debt service problems can harm financial institutions (that's an ironic understatement).
2. Creditors benefit as the real value of their assets rises. Of course, this assumes that debtors continue to pay.
3. Consumers benefit, because things get cheaper every day.
4. Not so good at the aggregate level. If we expect everything to be cheaper next month, we won't buy it this month. If we all defer our purchases in expectation of lower prices in the future, our aggregate demand falls and we produce less--which means we employ fewer people. With less income from lower production, prices fall further, so we push our big purchases off to the future again. And so on and so on. Deflationary spiral, I believe it is called. This is pretty much what happened in 1929-1933.

And while arguing by anecdotes is logically fallacious, acknowledging them can be fun. So I observed with bemusement Emmanuel's suit-shopping adventure, in which he bought a Hugo Boss suit at a low rate. Looking sharp, Emmanuel, but couldn't you have gotten them to toss in a better tie?

Seppeku

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.

Japan Tumbles

Things are looking very bleak in Japan:

The Japanese economy, the second largest in the world after the United States, is deteriorating at its fastest pace since the first oil crisis of the 1970s, hurt by rapidly shrinking exports and anemic spending at home in the global financial crisis.

The real gross domestic product of Japan shrank at an annual rate of 12.7 percent from October to December after contracting over the two previous quarters, the government said Monday. In the fourth quarter, GDP dropped 3.3 percent from the previous period.

Japan is suffering from some of the same conditions as the U.S., including high unemployment exacerbated by an appreciating currency. But Japan is much more reliant on exports than the U.S. is, and has had a much less dynamic economy over the past few decades despite many rounds of stimulus and infrastructure spending. Japan's recovery will likely lag the recoveries of the U.S. and Europe, since they depend so heavily on external demand for their exports. A Fistful of Euros has much more, including a good analysis of why the situation there is likely to get much worse before it gets any better.

The Obama Tightrope

It will be difficult not to fall off:

For Mr. Obama, the national debt has become a pressing dilemma. If he transitions too quickly from priming the economy with money to pulling back for the sake of fiscal rectitude, the president risks choking off whatever economic recovery he might spark in the next year. Ms. Romer points to the seesaw nature of the New Deal, when President Franklin D. Roosevelt would spend big one year and then back away the next, never allowing the economy really to get traction.

But if the administration waits too long to address the deficit, long-term interest rates may have to rise to attract buyers for all those Treasury bonds. That too could send the economy back into recession.

I'm defining "fall off" as a fate similar to Japan's since the mid-90s: lots of "stimulus" but no recovery. Lots of new infrastructure, but much of it wasteful. High debt-to-GDP ratios but little or no growth. An aging population putting increasing pressure on the budget through entitlement obligations. A banking system in flux, with a number of "too big to fail" zombie banks whose outright collapse would be massively damaging (see: Lehman Bros.) but whose continued existence prevents necessary adjustment in the financial sector.

The U.S. is not Japan, and we have some advantages over the Japanese (i.e. greater demand for our debt at lower yields, less dependence on exports to fuel the economy), but there are some parallels here and it is worth keeping them in mind.

What A Difference a Decade Makes

Last week, I wrote this:

We should also expand the role and capabilities of the IMF, just in case it becomes necessary to bailout a fairly large country (e.g. Great Britain?).

Today, we learn that Japan has agreed to loan $100bn to the IMF, and the Fund is also considering issuing bonds for the first time in its history. This sudden need for extra cash has not arisen because the Fund is short, but because it expects to be dealing with bigger problems in the future than it has in the past:

The IMF isn't in danger of running out of money, said deputy managing director John Lipsky, though the fund has made commitments to lend about $50 billion in recent months to Pakistan, Iceland and a clutch of Eastern European countries, and is talking to others.

But the organization has wanted for months to double its lending ability to about $500 billion from $250 billion, to bolster confidence that it could handle other borrowers amid the crisis.

Asked whether Western European countries, outside tiny Iceland, might turn to the IMF for loans if the crisis worsens, Mr. Lipsky said, "in the current circumstances, the right approach is 'never say never.'" The IMF's executive board is expected to discuss potential new sources of funding next month.

10 years ago, in the wake of the Asian Financial Crisis, Japan tried to establish the Asian Monetary Fund to directly compete with the IMF by providing loans to needy Asian countries with fewer strings attached. The effort was scuttled by the US, but many observers saw that moment as the beginning of the end of IMF relevance. Now, Japan is the one shoring up the IMF so it will have the resources to stabilize more and larger countries (presumably, so those countries will be in a position to buy Japanese export goods). The fact that the IMF is looking for hundreds of billions more funding is a bad sign; it indicates to me that the IMF has updated its beliefs and now thinks it might have to step in and bail out a major economy. In any case, the IMF is making a push for renewed influence, and nobody seems to be stepping in their way.

Once again, it appears that the New Economic Order is gonna look a lot like the Old Economic Order.

UPDATE: Emmanuel pointed out in the comments that this is somewhat old news (from mid-November). I missed it the first time around, and apparently the Wall Street Journal did as well.