Asahi, Mainichi; waste of money.
Yomiuri, Sankei; don’t waste the money.
Nikkei gives the closest thing to a line-item critique.
Who would have guessed?
I’ve copied the editorials (and their translations where available here are the editorials, since most media websites don’t keep them around very long
Showing posts with label the economic crisis. Show all posts
Showing posts with label the economic crisis. Show all posts
Sunday, April 12, 2009
Saturday, April 11, 2009
Gaijin Media Reaction to the Economic Package
Out of curiosity, I looked around to see what some of the main actors were saying; here’s my report. I should look at FT, The Economist, and the magazines, but not tonght.
WaPo does by far the best job—there’s some real depth here—though it suffers from what I think is an overreliance on pro-government sources. I trust the headline comes from the copy desk, and not the writer(s).
NYT provides some color on the details of the latest package.
No obvious mistakes by BBC, and the headline is matter-of-fact. It’s not print journalism, so I’m not going to complain.
CNN shows what happens when you look at the box-and-arrow diagrams on the government pdf document, then go out and interview a few analysts from securities firms to put together a report.
WaPo does by far the best job—there’s some real depth here—though it suffers from what I think is an overreliance on pro-government sources. I trust the headline comes from the copy desk, and not the writer(s).
NYT provides some color on the details of the latest package.
No obvious mistakes by BBC, and the headline is matter-of-fact. It’s not print journalism, so I’m not going to complain.
CNN shows what happens when you look at the box-and-arrow diagrams on the government pdf document, then go out and interview a few analysts from securities firms to put together a report.
Wednesday, March 11, 2009
Diet Members’ League to Examine the Issuance of Government Paper Money and Inheritance Tax-Free, Zero-Interest National Bonds Toils on…
Today, the Diet Members’ League to Examine the Issuance of Government Paper Money and Inheritance Tax-Free, Zero-Interest National Bonds presenting its recommendations to the Ministry of Finance and the LDP Policy Research Council. If you can’t guess what they are recommending, this highly negative take on the two ideas should shed a little light on the issue. I’m posting on this issue again because a media report says that the inheritance tax reduction (apparently, the DMLEIGPMITFZINB has backed away from the “tax-free” idea) is “intended to increase the liquidity of personal assets”.
Now I don’t know exactly what the DMLEIGPMITFZINB means by “personal assets”, but we won’t be losing much by way of logic if we limit consideration to financial assets and real estate. It’s probably safe to assume that people do not have hundreds of millions of yen in paper money lying around the house unless it’s the kind of money that, to put it gently, they don’t want people to know that they have. Bank accounts are another matter, but I don’t see how using that money to buy government bonds “enhances” the liquidity of personal assets. They could sell government bonds already in their possession, but I again fail to see any changes in “liquidity”, the only effect being a trade-off between lower inheritance tax revenues for smaller interest payments whose consequences for the national treasury is dubious at best. If they sell corporate shares to purchase the government bonds, then you could argue that “liquidity” has been enhanced. However, in these times, you want to encourage people to buy shares, not sell them. Same thing goes for real estate, whose prices have resumed their downturn in metropolitan areas as well. (It has never bottomed out in the provinces.)
So far, I have implicitly assumed that the assets in question are domestic ones. But they need not be. In fact, if people sold off foreign assets to finance the purchase of the government bonds, the immediate effect would be that that government can finance its deficit spending without crowding out domestic borrowers. Although there is a whiff of that beggar-thy-neighbor stench, it might be a nice way for all those people who have been losing money in the forex market to recoup some of those losses through the tax break. But I detect no movement to limit the measure to overseas assets.
This idea is as bogus as it gets. So, if you see Kaoru Yosano, please tell him to read my blog so he won’t have a change of heart. Thanks.
As for government scrip, I still believe that it’s a dangerous idea. But at least it makes as much sense as helicopter money.
Now I don’t know exactly what the DMLEIGPMITFZINB means by “personal assets”, but we won’t be losing much by way of logic if we limit consideration to financial assets and real estate. It’s probably safe to assume that people do not have hundreds of millions of yen in paper money lying around the house unless it’s the kind of money that, to put it gently, they don’t want people to know that they have. Bank accounts are another matter, but I don’t see how using that money to buy government bonds “enhances” the liquidity of personal assets. They could sell government bonds already in their possession, but I again fail to see any changes in “liquidity”, the only effect being a trade-off between lower inheritance tax revenues for smaller interest payments whose consequences for the national treasury is dubious at best. If they sell corporate shares to purchase the government bonds, then you could argue that “liquidity” has been enhanced. However, in these times, you want to encourage people to buy shares, not sell them. Same thing goes for real estate, whose prices have resumed their downturn in metropolitan areas as well. (It has never bottomed out in the provinces.)
So far, I have implicitly assumed that the assets in question are domestic ones. But they need not be. In fact, if people sold off foreign assets to finance the purchase of the government bonds, the immediate effect would be that that government can finance its deficit spending without crowding out domestic borrowers. Although there is a whiff of that beggar-thy-neighbor stench, it might be a nice way for all those people who have been losing money in the forex market to recoup some of those losses through the tax break. But I detect no movement to limit the measure to overseas assets.
This idea is as bogus as it gets. So, if you see Kaoru Yosano, please tell him to read my blog so he won’t have a change of heart. Thanks.
As for government scrip, I still believe that it’s a dangerous idea. But at least it makes as much sense as helicopter money.
Wednesday, February 11, 2009
Desperate Times Call for Desperate Means: Government Scrip and Inheritance-Tax-Exempt, Zero-Interest National Bonds
One of the less-noticed features of Yoshimi Watanabe’s Dear John letter to the LDP was his proposal to issue government paper money (in addition to the BOJ paper money and the government-issue coins) and use the funds to prop up the stock market. More recently, an old LDP chestnut, the inheritance-tax-free zero-interest national bond, has been revived by Yoshihide Suga and other prominent LDP MPs. Last Friday, the forces came together in the preparatory meeting for the establishment of the Diet Members’ League to Examine the Issuance of Government Paper Money and Inheritance Tax-Free, Zero-Interest National Bonds. (政府紙幣・無利子国債（相続税減免措置付き）発行を検討する議員連盟; it’s easier on the eye when you have space- and breath-saving kanji, sure, but eschewing katakana altogether?…Wait, is there a political agenda here?) Yoichi “Buried Treasure” Takahashi, the MOF bureaucrat-turned-academic and economic guru to LDP reformists, is the intellectual force behind this, if this report is to be believed. According to the media, the first idea was knocked down by old-school, older, fiscal conservatives such as faction leader and ex-Finance Minister Bunmei Ibuki and current Economic and Financial Regulation Minister Kaoru Yosano and the more expansion-minded Prime Minister Aso and Finance Minister Nakagawa, while the second received a somewhat warmer hearing. Now I have some respect for Professor Takahashi and I’m not an economist, but I have to say no to both. Let me explain:
Both measures are essentially interest-free loans; in fact, with paper money, the government doesn’t even have to repay the principle. That’s why most countries try to take segniorage out of the hands of politicians and leave it to an independent central bank. Otherwise, what you have is “scrip”—more appropriate for provisional governments, rebel regimes, Argentine provinces and mine site canteens.
Now government scrip stays in the monetary base forever unless it is redeemed with BOJ notes or other fungible assets. In fact, if I understand correctly, that is exactly the point—to increase the monetary base to raise prices and push consumption without swelling future debt repayments. But experience during the post-bubble years has shown that increasing the monetary base is like pushing on a string when nobody wants the money. I’m not an economist, but it looks like the measure runs a serious risk of runaway inflation if it is anywhere near effective in goosing demand. I’m siding with the people doing the worrying.
The inheritance-tax-free, zero-interest national bond by contrast has received a respectful nod from the LDP mainstream. Let’s take look at what this means.
The top inheritance tax rate—applicable above a net tax base of 300 million yen (after a maximum 47 million yen deduction)—is 50%, while the going annual interest rate for a maximum-maturity 30-year national bond is a shade under 2%. If we round up the interest rate to 2% and use it as the discount rate, the present value of the principal for a 100 million yen bond comes to 55.2 million yen. So it appears that someone on his deathbed who has a net tax base of more than 400 million can lock in a 5.2 million yen after-inhertance-tax profit on a 100-million yen, inheritance-tax-free, zero-interest bond—the difference between the bond’s 55.2 million present value and the 50 million-yen after-tax cash—for his heirs or other more worthy causes. (It is named inheritance tax but is in effect an estate tax.) Of course it doesn’t quite work that way, since the discount rate, which is equal to the corresponding interest rate, should be progressively higher for each later interest payment—which should be considered as independent cash flows for valuation purposes. Since the face value of a 100-million bond at a 2% interest rate is the sum of the present value of the principal and all the present values of the interest payments, all but the last of which are subject to lower discount rates than the principal, the present value of the principal and hence the present value of the zero-interest bond is lower than 55.2 million yen and likely lower than the 50 million threshold that would begin making the deal attractive at the margins, i.e., to wealthy people on their deathbeds. The terms under progressively shorter maturities improve rapidly for the 300-million-and-over tax base, though, with the effect of the shorter maturities being compounded by the lower discount rates. Note that a ten-year government bond currently carries an interest rate around 1.2-1.4%, a five-year bond 0.7-0.8%.
Now, it will not be difficult to calculate the break-even point for any given life expectancy under any given set of yield curves. Since the government cannot match the maturity of the bonds to the individual purchaser’s life expectancies but must set a single maturity for each issue, it will in principle have to give up more in terms of present value that it loses in inheritance taxes than it gains in interest that goes unpaid. And if the government is to have any hopes of taking in substantial revenue, that giveaway shall have to substantial as well.
And all that for what? Let’s say that the government manages to save a couple of hundred million yen in interest payments per year over ten years on a trillion-yen bond issue. That’s the kind of money that would help my cash flow, but would be lost in a 80-something trillion yen budget. Moreover, these “gains” will be more than cancelled out in the initial years by huge shortfalls in inheritance tax revenue, since purchasers of these bonds will be concentrated on the short end of the life expectancy range. In fact, I foresee a massive concentration of the shortfall coming in the first year of implementation. (Buy, then die quickly, would be the best strategy for people who buy the bond.) And that’s over and above the government giveaway that I referred to in the previous paragraph.
All this begs the question: Why bother? Unless of course, you want to turn it into a no-questions-asked money-laundering scheme—something not totally out of the question.
It is possible that the intent is to placate complaints from the wealthier LDP supporters that the inheritance tax is too high, and that the generally well-off LDP Diet members (if you are taking those annual disclosures of personal assets at face value, I have a bridge to sell you) are inclined to be more than sympathetic to their views. To be fair, I think that the top rate (or the threshold tax base thereof) is excessive, and I swear I have no personal financial interest in this issue either way. But that’s a different agenda that should be met head on, instead of sneaking in a one-off favor to the well-to-do before the DPJ and its allies with their more egalitarian background comes into power.
Both measures are essentially interest-free loans; in fact, with paper money, the government doesn’t even have to repay the principle. That’s why most countries try to take segniorage out of the hands of politicians and leave it to an independent central bank. Otherwise, what you have is “scrip”—more appropriate for provisional governments, rebel regimes, Argentine provinces and mine site canteens.
Now government scrip stays in the monetary base forever unless it is redeemed with BOJ notes or other fungible assets. In fact, if I understand correctly, that is exactly the point—to increase the monetary base to raise prices and push consumption without swelling future debt repayments. But experience during the post-bubble years has shown that increasing the monetary base is like pushing on a string when nobody wants the money. I’m not an economist, but it looks like the measure runs a serious risk of runaway inflation if it is anywhere near effective in goosing demand. I’m siding with the people doing the worrying.
The inheritance-tax-free, zero-interest national bond by contrast has received a respectful nod from the LDP mainstream. Let’s take look at what this means.
The top inheritance tax rate—applicable above a net tax base of 300 million yen (after a maximum 47 million yen deduction)—is 50%, while the going annual interest rate for a maximum-maturity 30-year national bond is a shade under 2%. If we round up the interest rate to 2% and use it as the discount rate, the present value of the principal for a 100 million yen bond comes to 55.2 million yen. So it appears that someone on his deathbed who has a net tax base of more than 400 million can lock in a 5.2 million yen after-inhertance-tax profit on a 100-million yen, inheritance-tax-free, zero-interest bond—the difference between the bond’s 55.2 million present value and the 50 million-yen after-tax cash—for his heirs or other more worthy causes. (It is named inheritance tax but is in effect an estate tax.) Of course it doesn’t quite work that way, since the discount rate, which is equal to the corresponding interest rate, should be progressively higher for each later interest payment—which should be considered as independent cash flows for valuation purposes. Since the face value of a 100-million bond at a 2% interest rate is the sum of the present value of the principal and all the present values of the interest payments, all but the last of which are subject to lower discount rates than the principal, the present value of the principal and hence the present value of the zero-interest bond is lower than 55.2 million yen and likely lower than the 50 million threshold that would begin making the deal attractive at the margins, i.e., to wealthy people on their deathbeds. The terms under progressively shorter maturities improve rapidly for the 300-million-and-over tax base, though, with the effect of the shorter maturities being compounded by the lower discount rates. Note that a ten-year government bond currently carries an interest rate around 1.2-1.4%, a five-year bond 0.7-0.8%.
Now, it will not be difficult to calculate the break-even point for any given life expectancy under any given set of yield curves. Since the government cannot match the maturity of the bonds to the individual purchaser’s life expectancies but must set a single maturity for each issue, it will in principle have to give up more in terms of present value that it loses in inheritance taxes than it gains in interest that goes unpaid. And if the government is to have any hopes of taking in substantial revenue, that giveaway shall have to substantial as well.
And all that for what? Let’s say that the government manages to save a couple of hundred million yen in interest payments per year over ten years on a trillion-yen bond issue. That’s the kind of money that would help my cash flow, but would be lost in a 80-something trillion yen budget. Moreover, these “gains” will be more than cancelled out in the initial years by huge shortfalls in inheritance tax revenue, since purchasers of these bonds will be concentrated on the short end of the life expectancy range. In fact, I foresee a massive concentration of the shortfall coming in the first year of implementation. (Buy, then die quickly, would be the best strategy for people who buy the bond.) And that’s over and above the government giveaway that I referred to in the previous paragraph.
All this begs the question: Why bother? Unless of course, you want to turn it into a no-questions-asked money-laundering scheme—something not totally out of the question.
It is possible that the intent is to placate complaints from the wealthier LDP supporters that the inheritance tax is too high, and that the generally well-off LDP Diet members (if you are taking those annual disclosures of personal assets at face value, I have a bridge to sell you) are inclined to be more than sympathetic to their views. To be fair, I think that the top rate (or the threshold tax base thereof) is excessive, and I swear I have no personal financial interest in this issue either way. But that’s a different agenda that should be met head on, instead of sneaking in a one-off favor to the well-to-do before the DPJ and its allies with their more egalitarian background comes into power.
Sunday, January 25, 2009
LDP Appears to Have Contained Dissent until After the Lower House Election
The New Komeito income tax rebate proposal that wound up turning into a 12 thousand yen per head, 2 trillion yen handout will surely go down in LDP history as one of its all-time public relations fiascos. The botched rollout of the Late-Term Elderly Medical Care Insurance system probably did more than any other single event to damage the Fukuda administration, but much of the blame for that in my view should go to the bureaucracy, but the handout was almost purely a political hack job. Sankei has a nice on-line post mortem in Japanese.
Given the lukewarm to frigid response from the experts, the handout may not have been a political panacea under the best of circumstances. But it’s not as if the Japanese public sat down, looked at the proposal and ran it through an economic model and 70% of them decided that it was an unsound idea either. It was the miasma generated by a waffling Prime Minister amidst all the political posturing and leaks that encouraged the negativity and made the public so receptive to it, while putting a decisive stamp of incompetence on the Aso administration.
So where do things go from here? The supplementary budget authorizing the handout and other expenditures passed the Lower House on 13 January and went to the Upper House. The Japanese Constitution all but guarantees that the budget will become effective within 30 days, so that part is a done deal. But budgets typically need legislation to secure the funds required to meet the expenditures; this supplementary budget is no exception*. On 19 January, the Aso Cabinet submitted a legislative bill that would authorize the government to a) issue long-term bonds and b) dig up buried treasures—transfer reserves from the Fiscal Investment and Loan Program Special Account to the General Account—in order to finance the handout and other expenditures. This bill requires a Lower House supermajority revote, after the Upper House opposition votes it down or refuses to vote for 60 days after receiving the bill from the Lower House. But dissatisfaction and fear is so strong among the LDP rank-and-file that there is talk of enough members—16 or more— breaking ranks to vote against the legislative bill to deny the Aso administration a supermajority.
Several scenarios are possible if such a thing comes to pass, but I do not see any plausible sequence that would not lead to an early snap election. In every case, the Aso administration would come to an end with the legislative failure. However, it is still highly unlikely that such a thing will come to pass. I noted before that the LDP had closed ranks after it resumed in the new year, and gave my take on the reasons why. In any case, the moment for a Lower House rebellion over the handout passed with the 19 January vote. Even Yoshimi Watanabe, who subsequently left the LDP of his own accord, merely abstained from the budget bill vote. He was joined by Kenta Matsunami, who got off with a mild scolding, a fact which may encourage a few other Lower House members to follow suit in the revote, but it is unlikely that they will breech the 50-abstention threshold required to deny a supermajority**.
Another potential tipping point arrived in the form of the internecine battle over Prime Minister Aso’s insistence on putting FY2011 as the target year for raising the consumption tax rate in drafting the FY 2009 tax bill, which, like any other legislative bill, would almost certainly require a Lower House supermajority. There was a dancing-on-the-head-of-a-pin quality to the argument, since no one in the LDP is willing to do so until the Japanese economy is out of the woods as far as the current recession is concerned. In the event, they came up with compromise language that tied a consumption tax hike to economic recovery as well as radical administrative and fiscal reform, a piece of rhetorical artistry that even the DPJ would find hard to reject on principle. In any case, the wording doesn’t matter; the important thing is that potential dissenters are on board, including, apparently, Hidenao Nakagawa. I now believe that this takes the issue out of play as far as splitting the LDP before the Lower House election is concerned, although, as in the case of the handout, I would not rule out a smattering of abstentions.
Since we’re talking about fiscal matters…
…Someone at a seminar asked why the Japanese government couldn’t its foreign currency reserves to prop up the Japanese economy. The speaker didn’t address the point directly, and I know that some of you reading this were there. Here’s my answer:
Japan finances its foreign currency reserves with short-term (1year and under) yen bonds. Think of our foreign currency reserves as a huge carry-trade operation. Using the short-term money to finance infrastructure investments would be risky; spending it on handouts for instance would be disastrous. In contrast, the reserves in petro-states can be used as political slush funds because they consist mainly of excess oil revenue.
Given the lukewarm to frigid response from the experts, the handout may not have been a political panacea under the best of circumstances. But it’s not as if the Japanese public sat down, looked at the proposal and ran it through an economic model and 70% of them decided that it was an unsound idea either. It was the miasma generated by a waffling Prime Minister amidst all the political posturing and leaks that encouraged the negativity and made the public so receptive to it, while putting a decisive stamp of incompetence on the Aso administration.
So where do things go from here? The supplementary budget authorizing the handout and other expenditures passed the Lower House on 13 January and went to the Upper House. The Japanese Constitution all but guarantees that the budget will become effective within 30 days, so that part is a done deal. But budgets typically need legislation to secure the funds required to meet the expenditures; this supplementary budget is no exception*. On 19 January, the Aso Cabinet submitted a legislative bill that would authorize the government to a) issue long-term bonds and b) dig up buried treasures—transfer reserves from the Fiscal Investment and Loan Program Special Account to the General Account—in order to finance the handout and other expenditures. This bill requires a Lower House supermajority revote, after the Upper House opposition votes it down or refuses to vote for 60 days after receiving the bill from the Lower House. But dissatisfaction and fear is so strong among the LDP rank-and-file that there is talk of enough members—16 or more— breaking ranks to vote against the legislative bill to deny the Aso administration a supermajority.
Several scenarios are possible if such a thing comes to pass, but I do not see any plausible sequence that would not lead to an early snap election. In every case, the Aso administration would come to an end with the legislative failure. However, it is still highly unlikely that such a thing will come to pass. I noted before that the LDP had closed ranks after it resumed in the new year, and gave my take on the reasons why. In any case, the moment for a Lower House rebellion over the handout passed with the 19 January vote. Even Yoshimi Watanabe, who subsequently left the LDP of his own accord, merely abstained from the budget bill vote. He was joined by Kenta Matsunami, who got off with a mild scolding, a fact which may encourage a few other Lower House members to follow suit in the revote, but it is unlikely that they will breech the 50-abstention threshold required to deny a supermajority**.
Another potential tipping point arrived in the form of the internecine battle over Prime Minister Aso’s insistence on putting FY2011 as the target year for raising the consumption tax rate in drafting the FY 2009 tax bill, which, like any other legislative bill, would almost certainly require a Lower House supermajority. There was a dancing-on-the-head-of-a-pin quality to the argument, since no one in the LDP is willing to do so until the Japanese economy is out of the woods as far as the current recession is concerned. In the event, they came up with compromise language that tied a consumption tax hike to economic recovery as well as radical administrative and fiscal reform, a piece of rhetorical artistry that even the DPJ would find hard to reject on principle. In any case, the wording doesn’t matter; the important thing is that potential dissenters are on board, including, apparently, Hidenao Nakagawa. I now believe that this takes the issue out of play as far as splitting the LDP before the Lower House election is concerned, although, as in the case of the handout, I would not rule out a smattering of abstentions.
* Supplementary budget bills are more often than not accompanied by taxation bills. This second supplementary budget bill is not, because the original tax rebate proposal was altered to a cash handout independent of the tax system.
** 1 nay=3 abstentions—if my arithmetic is any better than Fareed Zakaria’s.
Since we’re talking about fiscal matters…
…Someone at a seminar asked why the Japanese government couldn’t its foreign currency reserves to prop up the Japanese economy. The speaker didn’t address the point directly, and I know that some of you reading this were there. Here’s my answer:
Japan finances its foreign currency reserves with short-term (1year and under) yen bonds. Think of our foreign currency reserves as a huge carry-trade operation. Using the short-term money to finance infrastructure investments would be risky; spending it on handouts for instance would be disastrous. In contrast, the reserves in petro-states can be used as political slush funds because they consist mainly of excess oil revenue.
Friday, December 26, 2008
”No Buffer, No Resiliency”? Maybe. But What Does That Have to Do with the Current Economic Crisis?
On his blog for The Atlantic, James Fallows appears to be supporting “the argument that today's lean, hyper-efficient, ‘just in time’ economy was magnifying the effects of today's economic collapse.” Sounds plausible, but how does it stack up against statements from sages such as Alan Greenspan—okay, bad example—suggesting that lean production practices had the effect of smoothing out economic cycles? Let’s give the blame-lean-production theory a closer look, using the auto industry as an example.
Let’s say that a financial crisis leads to a credit crunch that deprives a cash-starved, lean-production auto company of adequate financing to maintain its production, distribution and sales operations. This process is repeated up and down the supply chain, causing overall auto production to plummet. The idea behind Fallows’ argument I suppose is that if this auto company (and its suppliers as well as its distribution chain) had maintained stocks of parts and components, it could continue producing autos even without financing until… until something happened to reduce the growing piles of unshipped autos on the company yard and docks and unsold autos on the dealer lots? And how does allowing that to happen ameliorate, rather than compound, the difficulties for the auto company? The current financial crisis, which has nothing to do with lean production, precipitated an economic downturn, which has nothing to do with lean production, that has lead to a dramatic fall in auto demand, which has nothing to do with lean production. The financial crisis exacerbates the precarious financial situation of the Detroit Three, which is connected to lean production only to the extent that they may have lagged behind their foreign competitors in adopting the practice.
The potential flaw in lean production lies in its logistics, not economics. Supply chains can indeed be disrupted, sometimes with dire consequences. That is why, for example, states and energy producers hold large, expensive, but immediately accessible reserve stocks. That is why manufacturers maintain multiple sources. Both these needs, of course, are balanced against costs. Auto companies are in less of a spot than providers of products whose supplies must not allowed to be disrupted, though they did encounter serious problems when the Niigata Earthquake damaged the production facilities of the major supplier for a vital component. Even then, the industry as a whole coped remarkably well, with what wound up being a mere blip in production—nobody noticed anything unusual at the retail level.
On a final note, the assertion that “’Just-In-Time,’ is based upon ... a wholly unjustified wager that the economy and its supporting systems will always remain stable and never experience disruption” and that it has anything meaningful to do with the current economic difficulties just doesn’t hold water; the whole thing is a straw man that was set up to justify an unfounded argument. Nobody is making such assumptions save the author of the essay for which Fallows uncharacteristically fell without bothering to match it up against reality.
ADD: I urge those of you who usually don’t read the comments to click to see what Janne has to say. I hope that my response is as interesting.
Let’s say that a financial crisis leads to a credit crunch that deprives a cash-starved, lean-production auto company of adequate financing to maintain its production, distribution and sales operations. This process is repeated up and down the supply chain, causing overall auto production to plummet. The idea behind Fallows’ argument I suppose is that if this auto company (and its suppliers as well as its distribution chain) had maintained stocks of parts and components, it could continue producing autos even without financing until… until something happened to reduce the growing piles of unshipped autos on the company yard and docks and unsold autos on the dealer lots? And how does allowing that to happen ameliorate, rather than compound, the difficulties for the auto company? The current financial crisis, which has nothing to do with lean production, precipitated an economic downturn, which has nothing to do with lean production, that has lead to a dramatic fall in auto demand, which has nothing to do with lean production. The financial crisis exacerbates the precarious financial situation of the Detroit Three, which is connected to lean production only to the extent that they may have lagged behind their foreign competitors in adopting the practice.
The potential flaw in lean production lies in its logistics, not economics. Supply chains can indeed be disrupted, sometimes with dire consequences. That is why, for example, states and energy producers hold large, expensive, but immediately accessible reserve stocks. That is why manufacturers maintain multiple sources. Both these needs, of course, are balanced against costs. Auto companies are in less of a spot than providers of products whose supplies must not allowed to be disrupted, though they did encounter serious problems when the Niigata Earthquake damaged the production facilities of the major supplier for a vital component. Even then, the industry as a whole coped remarkably well, with what wound up being a mere blip in production—nobody noticed anything unusual at the retail level.
On a final note, the assertion that “’Just-In-Time,’ is based upon ... a wholly unjustified wager that the economy and its supporting systems will always remain stable and never experience disruption” and that it has anything meaningful to do with the current economic difficulties just doesn’t hold water; the whole thing is a straw man that was set up to justify an unfounded argument. Nobody is making such assumptions save the author of the essay for which Fallows uncharacteristically fell without bothering to match it up against reality.
ADD: I urge those of you who usually don’t read the comments to click to see what Janne has to say. I hope that my response is as interesting.
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