Japan's stagnation a cautionary tale for the U.S.

The New York Times' Martin Fackler and Steve Lohr write that Japan's experience in responding to a financial crisis is that you need to restore economic growth before you worry about deficits.

Japan failed to restore growth. The result has been two decades of stagnation.

This is a cautionary tale for U.S. policy makers from both parties who have all but abandoned any attempt to jump start the economy.

I blogged about this in response to a Milwaukee Journal Sentinel op ed piece almost two years ago.

The entire NYT's article is linked.

Deregulation creates class of homeless workers

For more than three decades free market fundamentalists have criticised labor market regulations as an impediment to global competition and free markets.

They have worked to undermine the social contract that helped rescue the United States from the Great Depression, win World War II and create stable growth and the world's first blue-collar middle class.

Developed countries like France, Germany and Sweden with significantly stronger labor laws and generous social safety nets than the U.S. have been lectured on the need to develop more flexible and nibble labor forces. The result: a decline in full time permanent employment, the rise of a subclass of contingent workers who receive lower pay and fewer benefits than full-time permanent employees, and growing social inequality.

Now that the U. S, economic downturn has dragged the world economy into a recession, millions of unemployed workers are experiencing the dark side of deregulation and labor market flexibility-unemployment and homelessness.

Under Japan's traditional company centered social welfare system, firms were expected to look after employees until retirement and beyond, providing pensions and other benefits and keeping unemployment down by not laying off workers.

The neo-liberal model has undermined the traditional guarantee of life-time employment for so-called salarymen and tens of thousands of factory workers laboring in the country's small factories. They have been replaced by a contingent labor force, a subclass of Japanese workers, employed by staffing agencies or hired on short term contracts with lower wages and fewer benefits. These workers are not covered by legal protections against layoffs like regular full-time employees are.

Contingent workers now comprise over a third (34.5%) of the Japanese labor force. It is these workers, second class employees really, who are literally being thrown into the streets in response to the world's economic slowdown.

One hundred and twenty-five thousand (125,000) of the 131,000 Japanese workers who have been furloughed since October were nonregular, contingent workers according to the Japanese Labor Ministry.

According to the New York Times, these workers"...can expect little in the way of unemployment or welfare benefits." Japan simply does not have an adequate social safety net. Fully half of Japan's labor force is not even qualified for jobless benefits which were designed with lifetime employees, not contingent workers, in mind.

This is the dark side of deregulation-thousands of hard working people being literally throw into the streets as if they are used up machinery.

Next time you hear business leaders or economists promote labor market flexibility, ask them: how has flexibility helped Japan's new class of unemployed and homeless workers?

The Japanese experience with economic stimulus

In a front page Milwaukee Journal Sentinel Crossroads' column, Amity Shlaes cites the failure of Japan's "huge" fiscal stimulus program in the 1990s as a cautionary tale for President-elect Obama.

Shlaes who has become the darling of free market conservatives for her repudiation of the New Deal and all things Keynesian misrepresents the Japanese experience as a case of large public expenditures in infrastructure that failed to ignite the economy, arguing that infrastructure investments are better left to the private sector.

Leaving aside the obvious problem that a fiscal stimulus is needed precisely because private investment has collapsed, it's apparent that Shlaes is misinformed about Japan's experience. Perhaps she has not read Adam Posner's definitive work, Restoring Japan's Economic Growth, which is a detailed refutation of her arguments.

Japan's 1990s fiscal stimulus, changes in government spending and taxes, was disappointingly modest, not huge, as Shlaes contends. It amounted to only about a third of the announced stimulus and according to Posner: "This limited quantity of total fiscal stimulus was disbursed in insufficiently sized and inefficiently administered doses, with the exception of the 1995 stimulus package."

In 1995 Japan implemented an aggressive fiscal stimulus that led to strong economic growth in 1996. But its impact was undermined in 1996 and 1997 by fiscal contraction. Posner concludes: "On net, the Japanese fiscal stance in the 1990s was barely expansionary...."

The problem in Japan was not a huge stimulus package, as Shlaes contends, but an overly timid one.

This is similar to the U.S. experience in the 1930s. The economy began to grow in 1934 in response to increased deficit spending. But President Franklin Roosevelt, under pressure from his era's balanced budget hawks, was forced to cut federal spending in 1937 and the economy began to contract, only to be rescued by World War II and dramatic increases in federal spending.

So what are the real lessons President-elect Obama and his advisers should learn from Japan and the New Deal? First the stimulus package must be large enough ($700 billion to $1 trillion) to ignite the economy. And second, once the stimulus begins to work and the economy begins to grow, the Obama administration should reject any pressure from the Shlaes' crowd to prematurely cutback on the stimulus.