Opinion: America Could Spot Japan’s Economic Unease if Fed and Other Officials Ignore Warnings


As we stumble our way out of the current global COVID-19 pandemic that has imposed on us a biological disease, it is important that the United States does not succumb to another affliction that could have longer-term implications for our economy. The bulging central bank balance sheet, rising debt burdens, disappointing wage and productivity growth, as well as stagnant economic growth have been Japanese economic history for several decades. It is vital that our policy makers take the necessary steps to prevent economic lethargy from taking root in our system, as striking parallels continue to be expressed on a variety of issues between the two countries.

First, this should mean rejecting the model of “financial repression” adopted by the Japanese monetary and fiscal authorities, characterized by negative interest rates, high levels of government spending and debt, aggressive ownership of financial assets by the central bank. and a fiscal and regulatory policy. regime that discourages innovation and entrepreneurship. In the midst of its lost third decade, this approach has undermined the country’s former glorious growth profile and resulted in chronic stagnation. Since 1990, Japan has experienced a negative compound annual growth rate of industrial production. Public debt as a percentage of GDP now stands at 235% compared to 64% in 1990 and 50% in 1980. The Nikkei 225 NIK index, + 0.19%, the stock market benchmark of the country, has not yet recovered the peak reached in 1989 and has generated a negative annual return for the last 30 years. The initial culprit for these lost decades was a deflationary monetary error, which included a major contraction in money growth, in order to puncture what was perceived as a financial bubble. Subsequently, history has turned into an obsessive dependence on the creation of public debt and spending, along with a variety of hyperactive monetary actions. These include aggressive purchases by the Bank of Japan of government bonds, exchange-traded funds, and real estate investment trusts. This has proven to be a recipe for a perverse set of incentives that has undermined Japan’s growth and prosperity. This includes large swaths of Japanese companies that have access to capital that would have been denied in a merit-based, market-oriented system, as a collaborative effort between the government, banks, and monetary authorities keeps these companies with a chronic life support. While this could provide a mirage of stability, the long-term implications of these “zombie companies” are detrimental to economic efficiency and vitality. It also shows how ambitious Keynesian spending programs, with their supposed multiplier effects, routinely fail. Our policy makers, especially on the fiscal and monetary fronts, should heed the warning emanating from Japan, Inc., sooner rather than later. His model runs counter to the basic principles that have led to magnificent periods of economic prosperity in America and have provided rising living standards. This growth model, when it is at its best, is characterized by high levels of innovation, capital formation, startups, and strong productivity growth. Of particular concern on this front has been the rapid emergence of Modern Monetary Theory (MMT) as a legitimate methodology in some circles for policy making. It represents a direct refutation of Milton Friedman’s famous maxim that there is no free lunch. In reality, it is more of a political philosophy than an economic theory, and it has the potential to create an “iron triangle” that could jeopardize our fiscal well-being. This would consist of Congress aggressively allocating funds through legislation, Treasury Department authorities prepared and willing to fund this spending, and Federal Reserve officials willing to monetize newly minted Treasury debt with their magic checkbook. . With the US national debt recently exceeding the total value of GDP, this could prove catastrophic for our national balance sheet, not to mention the potential for hyperinflation, which has a historical precedent when aggressive money printing has been used. It would be far better for the Fed to take a rules-based approach to policy, such as a nominal GDP target or a price rule, and ensure that the process is not politicized. It is encouraging that it appears that our monetary authorities could head in this direction after a comprehensive review of strategic policy. A powerful first step was codified at the recent Jackson Hole Symposium, where President Jerome Powell officially extinguished the Phillips Curve, a relic of a concept that claims inflation and unemployment are inversely related, as a viable theory. This is a monumental development, as the idea that a robust labor market and low inflation cannot peacefully coexist has been disproved time and again over the past decades. This novel approach should lengthen future business cycles with days of robust growth unleashing an activist Fed fearful of waning inflation. This could be relevant later this year as a post-pandemic mini boomlet is likely to materialize In unison with a rules-based Fed and, unlike Japan, it is time for our fiscal authorities to aggressively adopt a growth agenda that it would do better and also reduce our national debt as part of the economy. A rediscovery of the 19th century French economist Jean-Baptiste Say and “Say’s Law” would be a good first step. The income generated by the productive side of the economy, both from goods and services, stands out as a necessary precursor for consumption. The goal should not be simply to redistribute current wealth through public spending, but to create wealth through incentive-oriented policies. This would include lower tax rates and higher after-tax rewards on income and capital, increasing incentives for work, risk-taking, and investment, thereby increasing output, employment, and output. While the ultimate goal should be an excise tax that exempts savings and investments from taxes, a greatly simplified tax code with lower marginal rates would be a good place to start. This would broaden the tax base and improve economic efficiency by reducing the distortions that can be created by excessive amounts of tax credits and deductions. Historically, a vibrant supply side of the economy coupled with solid money and relatively low taxes has proven to be a big economic winner and also boosted returns from both the S&P 500 SPX Index, -0.16% and the Dow Jones Industrial Average DJIA, + 0.02%. To express this pivotal moment in terms similar to Robert Frost, policymakers are presented with two diverging economic paths, with the one chosen making a difference to our future levels of prosperity and economic well-being. Time is of the essence. Jay Bowen is President and CIO of Bowen, Hanes & Company, Inc., an Atlanta-based investment advisory firm.