A maverick economist on Japan: overcoming thirty years of stagnation

SmithersRoadtoRecoveryThis is the second in my series exploring some of the ideas covered in the work of economist Andrew Smithers, particularly his wide-ranging book The Road to Recovery. In this post I want to consider his explanation for Japan’s relatively poor economic performance in recent decades, and his suggested solutions. His ideas overlap with those of other economists I have covered in this blog, such as Michael Pettis and Richard Koo, but much of the detail remains distinct, so they are worth writing about in a new post.

Japan’s economy has not had a good thirty years. After its post-war economic ‘miracle’, which saw it emerge from devastation to catch up rapidly with the world’s richest economies, its growth rate has largely stagnated since the 1990s. Successive governments have responded by periodically employing fiscal and monetary expansion (intended to boost demand), as well as reforms to business (intended to boost supply), seemingly without any great benefit. Of course, things might have been even worse without these reforms. It is also important to factor in the country’s ageing population, a population that has been shrinking overall since the mid-2000s. When this is taken into account, growth in GDP per head in recent years has actually been comparable to other rich economies, though this is nothing to shout about, as the US and Europe have not exactly distinguished themselves lately either. Continue reading

Considering the work of a maverick economist: introduction to a new series

AndrewSmithersI recently happened upon the work of economist Andrew Smithers, whose books and articles portray an unconventional and original thinker, and one who is unafraid to challenge the conventional wisdom in economic theory and policymaking. He could be classed as heterodox, while not falling easily into any particular political or ideological category. He studied at Cambridge in the 1950s, and was taught by, among others, the distinguished post-Keynesian Nicholas Kaldor, as well as Brian Reddaway. While he is now retired he continues to contribute to economic debate, via the Institute for New Economic Thinking, the Financial Times and elsewhere.

He has many years experience in international investment and has written extensively on financial economics, bringing together the spheres of finance and the real economy. His latest book is The Economics of the Stock Market, which is on my current reading list. However, I decided to start with his 2013 work The Road to Recovery, written in the wake of sluggish global growth following the financial crisis, followed by Productivity and the Bonus Culture, published in 2019, which tackles more comprehensively phenomena described in the earlier book.

The global economy has more recently been hit by shocks arising from a pandemic and war, but one of Smithers’ main contributions to economic debate is his argument that poor growth in output and productivity in the US and UK is largely down to the ‘bonus culture’ that has arisen in recent decades. Continue reading

Quote of the week: Keynesianism and global economic problems

Copland-DouglasFollowing the extracts I have posted in recent weeks, this is the last in the series from the 1947 edited volume The New Economics: Keynes’ Influence on Theory and Public Policy. Once again the piece is from the chapter by Douglas Copland, this time on addressing the problems of the global economy while maintaining a policy of high employment. In particular, Copland discusses the balance of payments and the high demand for imports that will tend to result from such a policy. As before, it is of historical interest, being written while Keynes’ influence was in its ascendency. But it also remains relevant today, in that conflict over international trade is much less likely if the countries concerned are able to achieve full employment. Free trade by itself is not enough and is unlikely to be sustained if it is not associated with high levels of employment and widely-shared prosperity. Continue reading

Michael Pettis on Evergrande and China’s debt problem

Another video of an interesting discussion with Peking University Finance Professor Michael Pettis where he explores the issue of China’s property sector and its current dynamics, but also the bigger picture of the Chinese economy’s debt problem. He outlines five possible options for the future evolution of the economy and foresees a significant slowdown in growth akin to Japan in the 1990s, which ushered in many years of stagnation amid its economic rebalancing. This rebalancing is essential for China but also the rest of the world, and will ultimately be good for the latter, albeit with the costs and benefits unevenly distributed between different countries and sectors.

Robert Reich on the real reason the economy might collapse

Below is another useful short and engaging video from former US Labour Secretary and Professor of Public Policy at UC Berkeley Robert Reich. This time, he returns to a recurrent theme, that rising inequality, not least in the US, increasingly constrains aggregate demand and economic growth. As income and wealth become more concentrated at the top of the distribution, due to wages failing to keep up with productivity, the growth of consumption, usually the largest component of aggregate demand, has become dependent on poorer groups going into debt, which itself is unsustainable. This is the underconsumption thesis, which has become influential among many left economists and some politicians.

Richer groups typically spend a smaller share of their income on consumption than poorer groups, so that for the economy as a whole, as long as investment is constrained by consumption rather than by savings, falling inequality will boost economic growth through its effect on raising sustainable consumption. If investment were constrained by savings, then a form of “trickle-down” economics could work, if rising savings led to rising investment. But sluggish underlying growth, notwithstanding the recession and recovery from the Covid crisis, has in recent decades been associated with falling interest rates and rising debt.

Economies have responded to the sluggish domestic demand associated with rising inequality in different ways. Some, such as the US and UK, have overseen rising debt, unevenly distributed among households, firms and the government. For a time this allowed growth to continue and has typically been accompanied by current account deficits, reflecting net borrowing from abroad. Others, such as Germany, have relied on growing net exports (export minus imports) and current account surpluses to sustain demand and growth. Current account surpluses in some countries are of course the necessary flipside of current account deficits elsewhere, since their total sum must be zero: they must balance at the global level. The surplus countries are international net lenders, funding and sustaining the deficit countries.

Crudely speaking, the solution to these imbalances and the unsustainable buildup of debt amid sluggish domestic demand and underlying growth is the same, even if the details vary between countries: policies which reduce the inequality of income and wealth would go a long way to boosting domestic demand, reducing the dependency of growing demand on rising debt or foreign demand reflected in rising net exports. All this has admittedly been complicated by the economic fallout from the Covid crisis, but in the longer term the trend of rising inequality needs to be reversed in order to restore more sustainable and balanced growth trends worldwide.

Reich’s video, which is certainly worth watching, does not go into these details, which concern both the US and the world beyond. But they are an important part of the story.

Trade Wars are Class Wars – reforming the global economy?

PettisKleinTWACWThis is the fourth and final post in a recent series drawing on ideas contained in the book Trade Wars are Class Wars, co-authored by economic journalist Matthew C. Klein and economics professor Michael Pettis. The last three posts explored, respectively, the importance of a macro or systemic analysis in economics, the nature and dynamics of savings and profits in the economy and the two broad models of economic development as set out by the authors in the book.

The essential thesis of the book is that rising inequality within many nations is restraining global demand and weakening global growth, leading to conflict over trade at the international level. In particular, excess savings, sometimes called a ‘savings glut’, in countries such as Germany and China, are reflected in current account surpluses. The latter are one way of saying that total savings in these countries exceeds total investment.

These positive net savings, or total savings minus total investment, are in these cases the flipside of underconsumption. They have proven to be unproductive, since they cannot be absorbed by productive domestic investment, and have therefore ended up being absorbed abroad, by countries which are willing to run current account deficits, fueling rising debt-fueled consumption, or rising unproductive investment in the form of financial speculation and asset price bubbles. For several decades, this has particularly been the case for the US, which has been willing to absorb unproductive savings from the surplus countries, and has therefore acted as a global spender of last resort in its provision of demand. Continue reading