Friday, August 21, 2009

Let’s Get Real When Making Recommendations for a DPJ Administration

The Wall Street Journal certainly qualifies as mainstream media…

While looking for something else, I bumped into this op-ed co-written by fellow blogger Tobias Harris. It is, as usual for Harris, intelligent and well written. (Disclosure: we are friends.) But it also displays a fundamental disregard for the realities. Let’s look at them one by one.
“If the DPJ wins on August 30, it will find itself heir to a fortunate legacy: Fiscal stimulus enacted by the current government, totaling roughly 5% of GDP, represents a large pool of capital, much of which has yet to be dispensed, ripe for spending to boost the economy.”
Actually, it’s roughly 4% of the GDP (see below). Is a 1 percentage-point difference trivial? Well, it is a 5 trillion-yen difference, and, as I like to say, a trillion here, a trillion here, and soon... but joking aside:

Of 19.7755 trillion yen (roughly 4% of GDP), 1.0641 trillion yen FY2008 I+4.7858 trillion yen FY2008 II=5.8499 trillion yen FY 2008 (and out of reach?), leaving 13.9256 trillion yen (a little less than 3% of GDP). Now, let’s take a closer look at the 13.9 trillion yen.

3.1066 trillion yen are money drawn from the Fiscal Investment and Lending Special Account—that is, part of the “buried treasures” that the DPJ is hoping to tap for the initial installments of their 3-year plan. If the DPJ spends it in FY2009, there’ll be that much less for its multi-year agenda. Almost all of the rest of the money, i.e. 10.8190 trillion, consists of borrowed money. Now a substantial amount of money has been dumped, as it were, in local governments and public institutions to be used as paid-in capital or to cover expenditures in worthy programs beyond the current fiscal year. I believe that this is the money that the DPJ likes to talk about. Now an administration that wishes to claw back some of this “stashed treasure” will have to force these governments and public institutions to stop these programs in mid-progress, adopt new FY2009 budgets—in the case of local governments with the consent of conservative local legislatures—and return the unused money. This is not going to be easy.

As for the rest of the 13.9 trillion yen, it is true that much of the money for the itemized subsidies has not been spent. But that does not mean that the recipients of the subsidies have not incurred expenses. In principle, expenses incurred according to a valid project approval must be made good, with contingent payments on expenses incurred typically coming from the government each quarter. The earliest that the DPJ can put a stop to such expenditures by recipients will be the middle of September, when Hatoyama takes over as Prime Minister. Something tells me that the recipients will be doing their damndest to make sure that they incur expenses as soon as possible, before the DPJ takes over. And the DPJ will have to do this about-turn while working out a new politics-bureaucracy relationship and preparing the FY2010 budget.

At a minimum, “a large pool of capital, much of which has yet to be dispensed, ripe for spending to boost the economy” is a chancy proposition. One way to minimize the difficulties of a turnabout is to warn the recipients of stimulus largesse to stop spending the money because the DPJ is going to suspend additional disbursements when it takes over. But this will send a chill through the entities involved in the implementation of the LDP stimulus packages and toss immediate ownership of the short-term fortunes of the Japanese economy onto DPJ shoulders, a burden that a new administration should be highly cautious of taking on.
“The DPJ could also build credibility by articulating some basic fiscal-policy principles that would distinguish it from the LDP. The ingredients are there already—party leaders have demonstrated some solid principles in this area. They just need to spell them out again ahead of the polling.

First among these would be aiming for a balanced budget…As an alternative to this history, the DPJ should offer measurable annual targets for deficit reduction. This will assure voters that the party sees a path back to balance.”
But this would tie the DPJ to measurable goals against highly provisional revenue and expenditure projections. This is likely to seriously damage their future credibility when they are likely to easily win this election anyway. So why bother to waste valuable intellectual and political resources to come up with iffy fiscal projections in the last ten days of an extremely busy political campaign?
“On a related note, the DPJ also should promise to postpone indefinitely any increase in the consumption tax.”
Why do this when the majority of the public acknowledges that a consumption tax hike is inevitable anyway? The current position of the DPJ, i.e. we’re not going talk about it until we’ve wrung the bureaucracy dry of unnecessary expenditures, is more than good enough.
“Instead of a consumption tax, the DPJ could offer a plan to broaden the corporate tax base.”
The DPJ is already committed to lowering the corporate tax rate for corporations with less than 100 million yen in paid-in capital to 11% (which in my view is an added incentive to undercapitalize your business or segment it into a gajillion separate corporations interlocked by mutual financial guarantees—the other incentive being the restrictive labor laws). In fact, the DPJ is committed to broadening the corporate tax base. It promises to put its foot down on the enormous web of tax incentives that has grown up over the years. Curiously, the op-ed does not acknowledge this. Beyond this, while a “[w]idening [of] the tax base while at the same time lowering the tax rate [may] leave the government less exposed to the business cycles of large companies,” it may also leave all businesses in the position of paying even more corporate taxes than they do now in the form of local taxes during times of economic duress.
“Perhaps most importantly, the DPJ should continue with broader-based reforms. One specific way would be to reverse plans to delay the privatization of Japan Post, currently set for an initial public offering in 2010.”
I agree. But this highlights the fundamental flaw of this op-ed. None of its recommendations will be adopted by the DPJ. Thus, it is as relevant to the political debate as a SPD election manifesto demanding that U.S. troops pull out of Okinawa altogether.

The sequel, here.


PaxAmericana said...

I don't understand the point about the WSJ. I suppose it's considered to be mainstream in the sense that Fox is, but how does that relate to Harris's op-ed?

Also, on the topic of money, do you think the Japanese government can cut the money spent on the American military? How do you see a DPJ attempt to do that playing out?

Jun Okumura said...


Sorry, Paxy, I was thinking out loud. Generally speaking, I try not to avoid using my blog to take up commentary that does not reach people who do not have a specific interest in things Japanese. …unless I can make it extremely funny or the commentary itself has become a subject in the MSM. That’s why I take up NYT, BBC and the like, but… on the other hand, let’s leave it at that. I also try to avoid commentaries by my friends for obvious reasons. But in this case, the flaw was so fundamental and so universal—if you doubt me, go through the newspaper editorials—that I couldn’t resist. Sorry, Tobias.

And yes, Fox News is at least as mainstream as, say, CNN. unless some eyeballs are more equal than others.

On your substantive point, I’d like to get around to writing something on the foreign policy and national security implications of the imminent takeover, and the sendoff money for the one-way trip to Guam is definitely one of the subtopics. In the meantime, as Edward A. Rice, Commander, U.S. Forces Japan, keeps reminding us, there’s a treaty in place for the Guam money. And if Hatoyama really has the guts to abrogate a treaty with the United States… Let me put it this way: His balls would sink faster in molten lead than Arnold Schwarzenegger in Terminator II. As for the omoiyari money, does the DPJ manifesto specifically refer to it? And does Hatoyama need that distraction?

PaxAmericana said...


The question of what is mainstream media may become interesting down the road, as the pretense of objectivity dies, and more people give up on the old newspapers and settle on blogs or overtly opinionated news sites. But, sure, I assumed you were having a conversation with somebody there, and couldn't understand it.

The issue with the American military (some might say danegelt) is going to be interesting. What can the DPJ really do? I certainly defer to your analysis, but I think that one scenario to keep in mind is how a global depression would play out. The British gold default in 1931 largely destroyed the world trading system back then, and a breakdown in the current dollar system could similarly lead to massive problems. A less dramatic case might be if there were a new Plaza Accord that cut the dollar's value by, say, 50%. This would keep the US afloat, but Japan could kiss any exports goodbye.

Jun Okumura said...

Pax Americana:

You’re right, it’s getting harder to draw a line, particularly in the United States. What is Politico, to begin with, for example? And all the major media outlets have their own blogs and a reporter is increasingly someone who’s allowed to blog at the office.

You’re not alone in putting forward danegelt (to use your colorful description) as a reason why the Japanese economy and government have in effect financed the U.S. trade and public deficits. I have no way of disproving it, and it certainly true that governments do not make decisions in isolation in total disregard of other policy questions. Here are s couple of points, though, that keep me from positing anything more than a tenuous link between the persistent bilateral trade imbalance and the financing thereof on the one hand and the fulfillment of Japan’s national security needs on the other.

The United States runs a large trade deficit with Germany, and an even larger trade deficit with China. The United States runs a large trade deficit, period. And they all hold much if not most of their reserves in dollar-denominated fixed-return assets. Could their diverse bilateral interests have mysteriously converged to arrive at the same conclusion?

Japan was running a trade deficit well into the 1960s when its national security needs were far greater than it is now (at least in the eyes of the LDP regime and its supporters). So were U.S. needs, but even as Japan swelled in value as a behind-the-lines support base for the U.S. war in Vietnam, the trade surplus turned around, this time for good, in favor of Japanese exports. Subsequently, the yen-dollar exchange rate has fluctuated dramatically over the years with little if any attention to the non-economic part of the bilateral relationship.

Finally, I don’t see any deliberate attempt at a major rebalancing of exchange rates working without bringing China, whose currency has a heavily managed exchange rate, into the effort. The Chinese authorities are not ready. That alone would dictate against anything like a new Plaza Agreement. Or so I think, but I’m really out of my range on this one.