April 20, 2012
Readers will no doubt be asking if Japan can be saved from the Washington Post after reading Fred Hiatt’s column titled (in the print edition) “Can Japan Save Itself?” The column slams readers with large masses of inaccuracy that pass for conventional wisdom in Washington.
The fun begins in the second paragraph which tells readers:
“Much of Europe has spent itself into near-bankruptcy.”
This is of course not true. While Greece and Portugal did have serious pre-crisis deficit problems, Europe’s real problem was that the European Central Bank was building the Maginot Line against inflation and ignoring the massive asset bubbles and resulting imbalances that would eventually lead to the economic crisis in 2008. If we had seen the same budget paths not accompanied by the economic crisis, governments would have relatively little difficulty dealing with their fiscal problems.
The next sentence tells readers that:
“In Washington, Simpson-Bowles has come and gone.”
Actually, Simpson-Bowles never came. The co-chairs’ report did not get the votes needed to be approved as a report of the commission. As folks outside Washington say, the Moment of Truth is a lie.
Then we get Japan’s big crisis. Japan’s debt to GDP ratio is 230 percent of GDP. While this is indeed a huge number, its interest burden last year was less than 1.0 percent of its GDP. This is because its short-term interest rate is near zero and even its 10-year bond rate is just 1.0 percent.
Japan’s major problem is not its debt, but rather a lack of demand. It still has not found a way to make up the demand lost from the collapse of its stock and housing bubble in 1989-1990. The proposal to double the value added tax from 5 percent to 10 percent, which Hiatt applauds, would go in the wrong direction.
This tax increase would reduce demand, lowering growth and decreasing employment. If Hiatt knows a way that this tax increase could boost growth he would probably win a Nobel prize in economics if he shared it with readers.
The piece also referred to Japan negotiating a “free-trade” agreement with the United States. This is wrong. Japan is negotiating a “trade” agreement with the United States. It cannot accurately be called a “free-trade” agreement since it will almost certainly result in an increase in some forms of protectionism, most notably patent and copyright protection.
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