Deficit Lessons From Japan


Kenneth Rogoff has some important observations to offer with regard to the decades long decline of Japan. He calls it a “slow motion crisis” and points to reasons why it eventually will come to a head.

His conclusion is worth noting:

Investors who have bet against Japan in the past have been badly burned, grossly underestimating the Japanese people’s remarkable flexibility and resilience. But the fiscal road ahead looks increasingly perilous, with political consensus fraying badly in recent years.

In the end, are foreign leaders right to scare their people with tales of Japan? Certainly, the hyperbole is overblown; the Chinese, especially, should be so lucky. But nor should apologists for deficits point to Japan as reason to be calm about outsized stimulus packages. Japan’s ability to trudge on in the face of huge adversity is admirable, but the risks of crisis ahead are surely greater than bond markets seem to recognize.

If anything, the Japanese tale may illustrate just how long it takes for extremely large, modern economies to slip into an irreversible decline. Put another way, they can continue to function somewhat acceptably in spite of the best efforts of the politicians to kill the goose. Unfortunately, the bill eventually comes due as Rogoff suggests is the case in Japan.

It’s worth noting that Rogoff sees Japan’s aging population and the nation’s inability to cope with that problem through loosened immigration policies as the straw that will eventually break the nation. I suspect that when this whole saga started some twenty odd years ago, that few bothered to look at those trends or if they did to sound any urgent alarms. That shouldn’t be surprising but does contain a lesson. If we indeed are on the same trajectory what might be the devil that does us in. Probably not the one that the blogs, MSM and politicians focus on and warn us about.

I was going to end this ramble at this point but the Bloomberg story today about the CBO rescoring the Obama budget proposals is pertinent:

President Barack Obama’s budget proposal would create bigger deficits than advertised every year of the next decade, with the shortfalls totaling $1.2 trillion more than the administration projected, according to the Congressional Budget Office.

Here’s a pictorial representation from Greg Mankiw’s blog:

It’s worth noting that both the President’s budget and the CBO assessment assume no adverse events over the next ten years. They do differ in their estimate of future economic growth but the possibility of recessions, wars or any other negative developments is not envisioned. Good luck with that scenario.

If Rogoff is right and the day of reckoning for the Japanese is approaching then maybe that will provide the necessary shock we need to cause us to admit to ourselves that deficits do matter. But the longer that takes, the longer we will have to lock ourselves into the same outcome.

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