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To Recover, Japan Must Ignore the Fallacies
by John Tamny, Toreador Research and Trading (Guest Contributor)
"The possibility of a rapid repair of their disasters, mainly depends on whether the country has been depopulated. If its effective population have not been extirpated at the time, and are not starved afterwards; then, with the same skill and knowledge which they had before, with their land and its permanent improvements undestroyed, and the more durable buildings probably unimpaired, or only partially injured, they have nearly all the requisites for their former amount of production."~ John Stuart Mill, Principles of Political Economy, Book I, chapter 5.
The ongoing tragedy in Japan has unsurprisingly generated a great deal of commentary covering how - and if - the country will recover economically from difficulties that at least from the television screen, seem insurmountable. The happy news is that if history is any kind of indicator, Japan will rebound with great speed.
And since Japan will recover, it's important to discuss some of the economic falsehoods that like Groundhog Day, always reveal themselves anytime a country suffers a natural disaster. This is useful because in discounting what's ahead for Japan, it's necessary to discredit the fallacies that will have nothing to do with the country's resuscitation.
First up is the sad, discredited, and surely horrifying notion that the collapse of country infrastructure, and its subsequent rebuild, will be economically stimulative. This false belief system was long ago discredited by economists Bastiat and Hazlitt who helpfully noted that while broken windows might stimulate glaziers, the unseen would be the investment that wouldn't occur in order fix what wasn't previously broken.
To buy into the silly reasoning popular among journalists and allegedly intelligent economists such as Larry Summers is to believe that each time the U.S. experiences an economic downturn, the path to recovery would consist of dynamiting various cities in order to put Americans to work. A more absurd bit of economic thinking would be hard to conceive, but sure enough, newspapers have been filled with just that kind of commentary since the tragedy in Japan struck.
As Adam Smith long ago observed, stationary economies are failed ones, so for a region or country to rely on disasters as a form of stimulus would be for both to see investment and the jobs it creates eventually depart. Destroying wealth in order to recreate it is the picture definition of a stationary economy, so only the truly dim would suggest that there's a silver lining tucked into Japan's monumental struggles.
Of course other supposed thinkers in the economic commentariat are making the point that due to the massive budget deficits run up by the profligate Japanese government over its two lost economic decades (stimulus spending advocates should take note: there is a correlation), the debt markets won't support the kind of government spending needed to rebuild what's been destroyed. But rather than worry about what may or may not be true, we should rejoice if Japan's politicians are in fact constrained.
To see why, it's necessary to look back to both Germany and Japan in the aftermath of World War II. As Howard Kershner wrote in his essential book, Dividing the Wealth, Germany "had suffered the loss of many millions of her strongest young men and had seen a great part of her homes, factories and business buildings destroyed." In short, Germany suffered something exponentially greater than did Japan last week.
Told by American advisors to engage in deficit spending to get Germany's economy moving again, the great German Finance Minister Ludwig Erhard responded that "We are not going to do it. We intend to balance our budget, not to incur any indebtedness, to avoid inflation and keep the mark stable and sound."
Thus began a major economic reawakening in Germany built on reduced taxes that rewarded those who sought profits in rebuilding the destroyed country, and underpinning this elevation of the productive was a mark that maintained its stability thanks to its link to a dollar defined in gold. As Kershner noted, "in a few short years Germany became the most prosperous country in Europe, if not in the world."
Japan was similarly reduced to rubble after WWII, and with its new government lacking any credibility to deficit spend, it too had to rely on the productive. So with a yen defined in terms of a gold dollar, Japanese politicians proceeded to reduce taxes every year after the war on the way to Japan becoming an extraordinarily rich country within a short period of time.
Fast forward to the present, capital is always scarce, and as such, the worst thing that could happen would be for Japan's government to go into debt even more in order to oversee what would almost certainly be a slower, more wasteful reconstruction. Better it would be for the country's politicians to reduce the cost of success on the way to a private sector revitalization that would only be hamstrung if the Japanese government were competing with it for scarce capital.
As Americans our instinct might be to petition Congress for foreign aid, but capital is capital, and any government charity coming from here would merely subtract from what private actors would access to rebuild. On the other hand, if we truly want to aid the Japanese, the single best thing we could do would be to demand a strong, stable dollar. The world's currencies remain vaguely or explicitly pegged to our greenback, so in stabilizing our currency, we'd be offering the Japanese something to peg to, and stable money is the single best way to drive the investment necessary for recovery.
Regarding those who wonder if Japan can recover at all, the mere question is absurd. Awful as the recent tragedy was and is, it's exponentially smaller than what befell Japan over fifty years ago. Japan will surely rise again, but it only will if its leaders avoid the embrace of economic fallacies, and simply allow the country's "vital few" to rebuild with profit in mind.
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Courtesy of Mises.org...
The Bastiat Collection (complete with the aforementioned fallacy) - http://mises.org/books/bastiat_collection_pocket.pdf
Things are alot worse and the US and Japan know it, why else you see the US evacuating many of their military and military dependants from Japan. What I see happening in the future with Japan isn't to pretty. As one person noted about the Daiichi nuclear power plant having issues is telling, it says that their may be other plants that have been damaged but they are hiding it. With so many plants in meltdown mode and hundreds of tons of spent rods burning, their has to be major radiation coming out of those plants. They are seeing radiation (Iodine) 3 to 4 times the natural amount in the drinking water in Tokyo, food is getting contaminated etc. etc..
Japan will or may lose 1/3 or 2/3 of the country to irradiation, and whats left of the population will be pushed into the remaining 1/3 and without enough resources (food, water, etc.) they may become a third world nation.
There will be a "recovery" of some kind, if only a potemkin recovery. Japan is too important to the US. If necessary the US will invent a "recovery" out of whole cloth.
This so-called "broken window" fallacy is, as we know here at ZH (so I am preaching to the choir to some extent), an absurd (il)logical error. I cannot believe it is being taken seriously by ANYONE. First there was planned obsolescence, now catalyzed obsolescence. Disaster is an occassion for economic rejoicing--"How fortunate we are to have been buffetted this Category 5 hurricane--rebuidling will certainly bring us happiness via increased GDP." By extension, be sure to do your duty to stimulate the economy: burn all of your possessions so that you will be forced to buy more! Pollute the environment as much as possible so that other companies will have to come in and clean it up, thus increasing GDP.
Thought of in the old Macchiavelian sense, does the "end" of increased GDP justify any means of attaining that goal? In this sense, a wide variety of unfortunate practices stimulate the economy: poor eating and exercise habits stimulate the productivity of the healtcare sector, arsonists stimulate demolition and building companies, murderers stimulate the casket industry, etc. The spin is nauseating, may I say. Remember, that the schizoid personality is often remarkably internally consistent and cogent, while at the same time remaining dysjunct from any wider reality. Building upon this, the only way that this type of logic can be promulgated is if increased GDP is the utmost good to which a country might aspire. Clearly the doctrine of perpetual economic growth no longer brings with it the marvels and prosperity that it once did, but our foolish leaders continue to myopically focus on increasing GDP at all costs. Unfortunately, we will reap what they sow.
Bank of Japan destroyed what was left of the economy by printing several hundred billion dollars in Yen. There will be no quick recovery for Japan and it will have a great impact on the world economy. Actually, the situation is out of control. Personally, I think this could be the straw.
That nagging 200% debt-to-GDP was a ball buster even before the ground shook. Don't see many sick dogs with this many problems getting well real soon.
The danger to Japan is that the disaster was not bad enough.
WWII forcibly reset Japanese politics, economic life, culture, and more importantly, psychology.
The earthquake, tsunami, and Fukushima have devastated the north, but the same timid decision making is in place, and perhaps making things worse in its response to the evident meltdown at Daiichi.
Unless some of the CEOs, banksters, and political fatcats start commiting seppuku for the shame of their response, things are not likely to change much.
Japan was devastated enough in August 1945 for entrepreneurs to try new things - too many of the entrenched bureaucracy remain in power in Japan in 2011 to assume that the same script as 1945 will be replayed.
The only scenario where the broken window leads to economic growth is if the rock that breaks the window likewise hits the home-owner on the head and breaks him out of his rut, and he starts thinking outside the box.
Broken window ephiphany, bitchez.
"Regarding those who wonder if Japan can recover at all, the mere question is absurd. Awful as the recent tragedy was and is, it's exponentially smaller than what befell Japan over fifty years ago."
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About 2000 tons of fissile material at Fuk, give or take. Hiroshima and Nagasaki bombs had about, what, 100 lbs of material?
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You sir, do not know what the fuck you are talking about. Who gave you posting privileges at ZH?
I don't think the rebuilding is going to be as quick and "quake-free" as most people imagine. Why would a business build a plant (microchips, car parts) in such a volitile part of the world? I'm thinking they'll move their plants elsewhere and maybe revisit Japan in a decade or two but for now they're looking for the most stable places in the world to create new plants.
Why would a business build a plant (microchips, car parts) in such a volitile part of the world?
A much bigger question mark comes after the word 'how'. Their energy production has taken a huge hit. Reactors damaged if not destroyed, LNG plants, thermal plants, refineries. Industry requires energy inputs.
How?
fallacies are like faecies they don't sink as fast as we would like them to. We desperately need an operation Graf Spree...in the bay of Fukushima.
The fatal assumption of this article is that it seems to believe that the worst is behind them...This may or may not be the case...but it is certainly too early to tell either way.
agree 100%.
X weeks from now things will shut down outside of Japan, for how long? nobody knows.
Just do a thought-experiment with me... What if *any* level of radiation - on car parts, electronics - is detected on imported Japanese parts? Would you ever buy anything from them again? or at least in any kind of timeframe short enough to matter to their export economy? I wouldn't, not as long as there's any other alternative in the world. Price can't fix this issue.
If you lived in Tokyo or its environs, given the complete loss of credibility of government authorities and the worrisome potential issues surrounding produce, water and dairy products, given any alternative, would you stay there?
I see it as a mega-New Orleans situation. Yeah, parts of it got rebuilt, but the population halved and it didn't really make much of a shit. Top Japan's sundae off with the fact that they're not currently replacing their own population and I certainly don't see how you can make a case for a Japanese rebirth, at least not on demographic grounds.
Sometimes, when the window gets broken, the place turns into a crackhouse until the police eventually bulldoze it over.
Zack, you point to one obvious fact that the article's author overlooks. After WWII, the Japanese population was young and could multiply into growth. Now, the Japanese population is old. They are in no shape to grow.
Top this off with the fact Japan is heavily in debt now (no debt after the war) makes potential growth difficult to conceive.
Japan is in a demographic nose dive, with population already declining. Unless that is reversed, and it won't be easy, the long term prognosis is extremely bearish.
Can't have a proper ponzi without a growing populace.
And the US is just about a decade behind them. 2001 - 2010 was our first <1% annual population growth decade since the 1930s.
The author conveniently overlooks the 200% debt to GDP ratio. 95% is held domestically, mainly by the older generation, so inflating this away is going to impoverish great numbers. I would have thought any attempt at restructuring would be bankrupt the banking and insurance sector
The author also overlooks the fact that a crowded country has just lost a chunk of land (the size of the chunk is TBD) permanently. Their economic miracle is based on nuclear power, which either the Japanese will want to curtail, or if they don't, could blow up again.
perhaps the most important "fallacy" that should be ignored is that one being pushed on us by sell side analysts claiming everything is fine and nothing has changed but for the better.
"What if *any* level of radiation - on car parts, electronics - is detected on imported Japanese parts?"
This is being monitored. You will have to take my word on that.
No it won't and people will continue buying anything given to them.
Do you honestly think that the Orange Juice that most people are drinking doesn't have an acceptable dose of Cortex in it right now mixed in with whatever crap they've been dumping into the gulf? That along with tomatoes...delicious english cucumbers grown organically in Florida...water is life and Florida is the winter bread basket for everyone in North America.
I'm not convinced that the semi conductor in iPhones, or the ECU on board computer, or the timing mechanism in the coffee pot, or the bike parts (oddly Japan still is a heavy manufacturing hub for bikes), or the prized ginger and the MASSIVE holdings of pink Himalayan salt (anyone heard of the Sherpa millionare? nope.) that Food freaks go berzerk for will be tested. Doubtful. Port authorities don't even have the resources to catch the cocaine/terrorist/whatever is feared at any US port.
I would go on, but Japan is part of the G7 for a reason and holds ALOT of assets, many of which we all use.
As a nation, Japan had a population problem before the Nuke plant lit up. Do you think for two seconds anyone under the age of 30 isn't having a single thought going through their head right now. "Fuck this shit, I'm out of here." Japan offers little in the way of a future unless it's geriatric care which is wiping asses and feeding pills to the elderly.
I agree with you, that is why it is important if you have the means, to do the testing yourself. I was not talking about leaving it up to the authorities.