The New York Times published a story by Liz Alderman dated November 17, 2014 entitled “As Japan Falls Into Recession, Europe Looks to Avoid It.” The article begins with a burst of (unattributed) economic illiteracy.
“Japan looked like the model for economic revival. Growth was back on track. The stock market was surging. Inflation, which had eluded Japan for decades, was even returning.
But Japan’s grand economic experiment, a combination of fiscal discipline and monetary stimulus, is collapsing. On Monday, the country unexpectedly fell into recession, a downturn that has painful implications for the rest of the world.
Japan’s unorthodox strategy was supposed to offer a road map for other troubled economies, notably Europe. Fiscal belt-tightening and tax increases, while leaning on the central bank to pump money into the economy, was expected to help overcome a malaise.”
In a prior column I gave mock praise to Alderman because after editorializing for eurozone austerity for years in her columns she finally admitted that “many economists” criticized those policies. I cautioned, however, that the NYT reporters, including Alderman, assigned to cover the eurozone “are austerians to the core.” Here comments about Europe and Japan prove my point. First, Japan did not look like “the model for economic revival” when it endorsed austerity through sharp increases in its sales tax. It looked like a model for a gratuitous recession. The stock market surge and moving towards achieving desirable levels of modest inflation occurred in part in response to the fiscal stimulus that the new Japanese government decided to replace with fiscal austerity. But other government policies were more important in explaining these results – and explaining why they were artificial. By announcing the rise in the sales tax from five to eight percent in advance the government spurred a sharp increase in consumption of durable goods prior to the increase. By moving government funds from safer investments to stock purchases the government spurred a rise in the stock market.
Japan did not fall “unexpectedly” into recession from the perspective of financially literate economists. It fell into a recession that it was warned was a grave risk given its adoption of austerity through a sharp increase in the sales tax (with a further increase scheduled for next October that will likely now be suspended). Contrary to what Alderman’s column implies, Japan has not even reached its inflation target of two percent. Austerity was madness in these circumstances. We certainly never expected it to work in Japan.
“‘The numbers are absolutely awful, beyond-description awful,’ said Peter Tasker, a longtime analyst of Japan’s economy and a supporter of Abe’s policies. ‘It’s clear that the tax hikers and the fiscal hawks have tanked the economy.’”
Alderman is shocked, shocked that austerity has (again) caused a gratuitous recession. There is an ironic proof of how non-shocking Japan’s latest recession is – from two-and-a-half years ago. It is ironic because it is contained in an economically illiterate article in Bloomberg of the usual “there is no alternative” (TINA) to austerity dogma. Every aspect of Bloomberg article is driven by ignoring the fact that Japan has a sovereign currency and inadequate inflation (and, often, deflation). The article’s meme is that Japan’s government is dealing with its acute “fiscal crisis” (sic) by showing the courage to “tackle [the] sales tax ‘taboo’ that Obama won’t touch.” As bad as the Bloomberg article was, it did admit that raising the sales tax would endanger Japan’s “economic growth” and that “the last time Japan did so, it helped cause a recession.”
The article (unintentionally) admitted that Japan’s “fiscal crisis” was fictional because Japan has a sovereign currency.
“Japan’s debt to GDP ratio is estimated to rise to twice the size of the economy this year, compared with Greece’s 123 percent, according to the Organization for Economic Cooperation and Development.
A deteriorating fiscal situation hasn’t spurred an increase in Japan’s benchmark bond yields yet, with 10-year securities yielding 1.3 percent — the lowest among G-7 nations because of the economy’s deflation.”
The supposed “crisis” from a budget deficit is supposed to be hyperinflation. Japan, according to the article was suffering from “deflation.” Some “fiscal crisis!” Hyperinflation is supposed to cause crushing interest rates when the government borrows money – except that Japan was able to borrow enormous sums as exceptionally low interest rates. Some “fiscal crisis!”
To sum it up, Bloomberg praised Japan’s leadership (Abe’s predecessor) for taking an action sure to reduce economic growth and that had recently thrown Japan back into a gratuitous recession, in order to “fix” a fictional “fiscal crisis” that was actually critical to recovery. The article then turned to demeaning Obama as lacking the courage to inflict a consumption tax (VAT) on the U.S. despite (sound the hysteria horn) “a projected record budget deficit of $1.6 trillion this year.”
Far from being “unexpected,” Japan’s most recent recession follows a well-known pattern. This warning (albeit mangled by Bloomberg’s dogmas and financial illiteracy) has been in print for two-and-a-half years.
Alderman, writing in late 2014, has no excuse for her shock that austerity has, again, led to a gratuitous recession. She could, for example, read a Nobel Laureate in Economics who is a colleague at the NYT. Of course, the research task of finding an op ed by Paul Krugman on the subject of Japan would be so onerous because of the need to search back through years of columns all the way to the dim recesses of November 2, 2014. She could also look at the effect of stimulus on the size of the U.S. federal budget deficit. Here, she would have had to reach all the way back to November 16, 2014.
Alternatively, she could have just read her own article. Specifically, the part where she wrote:
“‘The United States is about the only growth beacon in the global economy right now, and that is not a very nice place to be,’ said Jacob Funk Kirkegaard, an economist at the Peterson Institute for International Economics in Washington.”
No meaningful inflation, the ability to borrow at near zero interest rates, a rapidly falling budget deficit, and “about the only growth beacon in the global economy” – that’s pretty good for what Bloomberg tried to falsely portray as an irresponsible U.S. that failed to display the courage necessary to adopt a consumption tax to counter our record (albeit fictional) fiscal crisis.
Or she could have read this portion of her article:
“Last week, Treasury Secretary Jack Lew said in a speech in Seattle that the United States was increasingly being relied upon to perform as locomotive for a global recovery.
‘But the global economy cannot prosper broadly relying on the United States to be the importer of first and last resort, nor can it rely on the United States to grow fast enough to make up for weak growth in major world economies,’ he said.”
These two quotations, and their sources, should have produced two glorious ironic passages in Alderman’s article. Alderman’s “go to” economist is Kirkegaard. In fairness to her, she does identify where she works. What she doesn’t inform the reader is that Pete Peterson is the leading austerian hysteria in the world and that his institute hires economists dedicated to praising austerity. Unsurprisingly, his institute also authored the infamous Washington Consensus. So, first, she is relying on the institute that has proven wrong – repeatedly about austerity. Second, Kirkegaard’s comments implicitly concede that we have been right and the nations that followed his advice have proven disastrously wrong.
Lew is also a wondrously humorous choice for Alderman to cite. As I explained in prior articles, Lew was part of the Obama administration effort to commit the Grand Betrayal in 2010, which shredded the safety net and embraced austerity. Alderman, Kirkegaard, and Lew share two characteristics: a love of austerity and the inability to admit they were wrong and apologize for the terrible human misery their policies have inflicted.