Abenomics: Fool Me Once
Japan’s economy is a lifeless corpse. In the 1990s, Tokyo propped up zombie banks: institutions that are solvent in name only. In the aftermath of the Great Recession, Japan ensured these companies remained open. Today, Prime Minister Shinzo Abe is presiding over a zombie economy, and he thinks he has a solution to inject new life into the rotting carcass: another round of Abenomics!
After a string of natural disasters this past summer, the world’s third-largest economy contracted 0.3% in the third quarter. Overall, consumer spending declined 0.1%, exports fell 1.8%, capital spending slipped 0.2%, and prices for basic foods surged. A recent survey of economists suggest a rebound in the fourth quarter, but the federal government is not taking any chances, especially with a looming trade dispute with the U.S. on the horizon.
Economy Minister Toshimitsu Motegi told attendees at a recent Council on Economic and Fiscal Policy (CEFP) that the prime minister is demanding a stimulus program that would include aggressive infrastructure spending:
“The prime minister asked me to take firm measures to ensure that our economic recovery continues. He also said the public works spending program expected at the end of this year should be compiled with this point in mind.”
Fool me once, shame on you – but don’t expect it to work a second time.
Abenomics: A Failed Policy
Since coming into power in 2012, Abe has intervened into the national economy on multiple occasions. As part of efforts to spur growth, Abe has embraced Keynesian economics – a blend of government spending, tax hikes, and money printing – to achieve his objectives. The results have been disappointing.
Here is a list of policies Abe and his administration have implemented in the last six years:
- Increased sales taxes – another hike is expected next year.
- Mandated higher salaries and wages.
- Directed the Bank of Japan to purchase $1 trillion in bonds.
- Raised the national debt to 240% of gross domestic product.
- Introduced several social programs, including national childcare.
Some of these announcements jumpstarted the stock market, mainly because Japan Inc. went on a buying spree fueled by the BOJ’s credit expansion. The buzz quickly faded, though, prompting Tokyo to implement additional stimulus to relive the same high.
Fast forward to 2018: Japan’s economy is on life support. The BOJ has confirmed it will maintain an ultra-loose and accommodative monetary policy – low interest rates and more bond-buying. Unlike previous initiatives, a stampede of bears has rushed through the country. Analysts and economists are not optimistic that Japan can dig its way out.
Unemployment may be low, but all the elements critical to growth are not invigorating investor spirits. You only need to examine the Cabinet Office’s Coincident Index, a measurement of jobs, industrial output, and retail sales. It plunged 2.1 points in September to 114.60, an 18-month low.
Why It Never Works
Anytime the economy stumbles, leaders are quick to respond, whether it’s through the guise of a "shovel-ready" public-works project or a financial injection like a rebate check. It is rare to find leaders willing to weather the economic storm, as former President Warren G. Harding did following the First World War. They fear if they do not act, then the opposition will pounce, and the electorate will question, “Why isn’t he doing something?”
But it is a confidence trick.
Typically, there are three ways to fund these extravagant pursuits for prosperity: tax, borrow, and print. In recent years, governments everywhere have adopted all three policies, and now trillions of dollars, euros, and yuan have entered the global economy. Debt is pervasive, deficits are the new norm, and tepid growth is inducing headaches at central banks worldwide.
Every state-led expenditure must be paid for somehow, which is why spending is a levy. This is money taken out of the private sector; the people cannot save, businesses invest less in capital, and the remaining capital is consumed. This is terrible news for the economy.
But it is necessary because it provides jobs and stimulates the economy, says the statist economist. This is the seen benefit — voters see men with asphalt and shovels getting paychecks. What about the unseen? Since this endeavor was funded by the theft of $1 billion from taxpayers, that’s $1 billion less for the private sector to hire workers, buy stuff, or invest in a new business. The unbuilt property, the unmade phone, or the unsold food — these things cannot happen because there was a diversion and misallocation of resources by bureaucrats.
The grafters cannot win elections if voters do not see the cutting-ribbon ceremonies!
Legendary economist Walter Williams said it best:
“The fact that Congress has no resources of its very own forces us to recognize that the only way Congress can give one American one dollar is to first — through intimidation, threats and coercion — confiscate that dollar from some other American through the tax code.”
Or, in this case, the National Diet of Japan doesn’t have a single yen of its own.