Will the DPJ weather the global rebalancing?

David Brooks's latest column in the New York Times calls for a restoration of "economic values" in the United States, with the aim of making "the U.S. again a producer economy, not a consumer economy." Brooks sees a decline in traditional values of restraint behind the rise of consumer spending to ever greater portions of GDP and the growing indebtedness of consumers. Whether or not the emergence of the US as a consumer economy is a function of declining values, greater restraint by US consumers is the flip side of Japanese consumers spending more of hoarded savings. After all, the growth of the US consumer economy was accompanied by global imbalances, massive current account surpluses by countries like Japan.

The question now is how to execute the transition to a more balanced relationship among the world's economies, including and especially in the relationship between the US and Japan. How can the US become relatively more predisposed to production and Japan relatively more predisposed to consumption (especially of imports from the US and elsewhere)? The FT's Wolfgang Münchau praises the G20 for at least recognizing the problem of imbalances. For his part Münchau rejects the notion that adjustment can happen automatically simply by US households changing their behavior — or rather, that it can happen, but the transition will be painful everywhere, as Japanese exporters, deprived of American consumption, have discovered over the past year. Instead he argues that each country will have to adjust in its own way:

The answer is that policy will have to be tailor-made to suit the specific circumstances of each country. China will probably not be able to reduce its excessive current account surplus without a revaluation of the renminbi. In Germany, the best overall macro-policy instrument would be a big tax cut to boost domestic demand. In the UK, restoration of balance will have to include heavy cuts in public spending, while Spain will also have to raise taxes, even in addition to last week's announcement of a rise in value-added tax.

And what of Japan?

The DPJ fully acknowledged during the campaign that the challenge facing the government is managing the transition from the postwar producer economy — divided between efficient exporters and inefficient domestic producers and service providers — to a more consumer-centered economy.

But less clear is how the Hatoyama government plans to contribute to the global rebalancing. After all, the government has few policy tools at its disposal. Interest rates cannot go any lower. The government's debt burden limits its ability to use public funds to make up for weak private consumption. The yen's exchange rate is one tool available to the government, but as Finance Minister Fujii Hirohisa's conflicting remarks suggest, there are political limits to how far the government can permit an undervalued yen to rise. After stating following a summit with US Treasury Secretary Timothy Geithner on the sidelines of the G20 summit in Pittsburgh last week that the government would not intervene to keep the yen down, Fujii subsequently softened his position, alluding to intervention should the dollar-yen exchange rate rise too rapidly.

Richard Posner's note upon reading John Maynard Keynes's General Theory of Employment, Interest, and Money for the first time — "How I Became a Keynesian" — makes for interesting reading in light of Japan's dilemma. Posner highlights Keynes's focus on consumption as the engine of growth in an economy — and how uncertainty can trigger hoarding. "People do not save just to be able to make a specific future expenditure; they may also be hedging against uncertainty," writes Posner. "And the third claim, related to the second, is that uncertainty — in the sense of a risk that, unlike the risk of losing at roulette, cannot be calculated — is a pervasive feature of the economic environment, particularly with respect to projects intended to satisfy future consumption." This passage strikes me as a particularly succinct description of the problem faced by the Japanese government since the bubble burst: how can the government dispel the ubiquitous sense of uncertainty on the part of Japan's aging consumers? LDP governments engaged in policies that took the outward form of Keynesianism — large-scale construction projects — without appreciating the essence of Keynes, that the goal ultimately was (and is) getting consumers secure enough to spend their own money again. For all the dams and bridges built by the government, the money probably would have been better spent rebuilding the social safety net, which would have in turn made the economy better capable of weathering the transition from the producer-centered dual economy.

In short, the DPJ-led government will attempt what should have been done a decade ago, except that now its fiscal policy options are constrained and the global economy is recovering from a monumental crisis. It will have less recourse to foreign demand to ease the pain of transition than the LDP had up until the global financial crisis. Ultimately the DPJ may be able to do little more than make the transformation marginally less painful, but, as Noah Smith wrote at this blog earlier this year, it will be painful nevertheless. The DPJ may be able to extend its time in office if it is able to deliver adequate social spending in its budgets, but admittedly the prospects for success are grim. The government may simply not have the tools at its disposal to overcome the thriftiness of the Japanese people in an age of uncertainty — but it could pay the political price for "inaction" anyway.

Fear and loathing in the global economy

Every once in a while, I read an article that is worth posting largely without comment. Tony Judt, a professor of European history at NYU, has written one such article, a review in the New York Review of Books of Robert Reich's Supercapitalism.

The key paragraphs:

But we have good reason to believe that this may be about to change. Fear is reemerging as an active ingredient of political life in Western democracies. Fear of terrorism, of course; but also, and perhaps more insidiously, fear of the uncontrollable speed of change, fear of the loss of employment, fear of losing ground to others in an increasingly unequal distribution of resources, fear of losing control of the circumstances and routines of one's daily life. And, perhaps above all, fear that it is not just we who can no longer shape our lives but that those in authority have lost control as well, to forces beyond their reach.

Half a century of security and prosperity has largely erased the memory of the last time an "economic age" collapsed into an era of fear. We have become stridently insistent—in our economic calculations, our political practices, our international strategies, even our educational priorities—that the past has little of relevance to teach us. Ours, we insist, is a new world; its risks and opportunities are without precedent. Our parents and grandparents, however, who lived the consequences of the unraveling of an earlier economic age, had a far sharper sense of what can happen to a society when private and sectional interests trump public goals and obscure the common good.

We need to recover some of that sense. We are likely, in any event, to rediscover the state thanks to globalization itself. Populations experiencing increased economic and physical insecurity will retreat to the political symbols, legal resources, and physical barriers that only a territorial state can provide. This is already happening in many countries: note the rising attraction of protectionism in American politics, the appeal of "anti-immigrant" parties across Western Europe, the call for "walls," "barriers," and "tests" everywhere. "Flat worlders" may be in for a surprise. Moreover, while it may be true that globalization and "supercapitalism" reduce differences between countries, they typically amplify inequality within them—in China, for instance, or the US—with disruptive political implications.

In the midst of an unfolding credit crisis that could wind up destroying major US banks and who knows what else, Professor Judt is sobering as only a historian of the European twentieth century can be.

Read the whole thing. (HT: Andrew Sullivan)

What's in a name?

Quite a bit, when the name is that of an important government policy document, and when that name is missing a phrase near and dear to the former prime minister's heart.

So suggests the Asahi Shimbun in its editorial on the Abe government's recently announced 2007 fiscal policy plan.

Unlike the title of the annual fiscal policy plans produced under Koizumi's watch — "Basic policies for economic and fiscal management and structural reform" — the Abe's Cabinet's program is called simply "Basic policies for economic and fiscal management." And so, concludes Asahi, "the flag of 'structural reform' has vanished."

To Asahi, this is yet another sign, perhaps the clearest yet, that the Abe Cabinet has discarded the Koizumi Cabinet's "no growth without reform" motto and the policy perspective behind it. The policies in this program timid — a hodgepodge of vague "pro-growth" policies including more funding for universities, "investigating" economic partnership agreements with the EU and the US, "drastic [but unspecified] tax reform," and a ludicrous promise to double Japan's OECD-worst productivity in five years (see Ken Worsley on this point in particular), packed into fifty-two pages, the longest such report since the government first began drafting them. Not only is there no overall vision beyond the Abe program, but the lack of detail leaves room for bureaucrats to muscle back in, as Asahi noted when a first draft was issued to the public.

Yomiuri, for its part, also noted the lack of details in the program — and a lack of priorities. At the same time, however, Yomiuri seems to give the prime minister the benefit of the doubt, gently chiding Abe for not giving enough details now, but assuming he'll get around to it eventually.

Considering the point I raised in this post earlier today, this damp squib of a document is not just another dull, useless policy report issued by the government — it is a sign of the utter failure of imagination that characterizes policy making throughout the developed world.

Are we all social democrats now?

I could not help asking that question — paraphrasing Richard Nixon's famous pronouncement — read a pair of articles that look at how post-industrial global capitalism is evolving, and how publics, especially in the US and other mature democracies, are responding to the emergent order.

In Foreign Affairs, Kenneth Scheve and Matthew Slaughter, noting the rise of protectionism in the US, call for a "New Deal" for the post-industrial age (hat tip: Arts and Letters Daily). The basis for their argument is quite simple:

...Policy is becoming more protectionist because the public is becoming more protectionist, and the public is becoming more protectionist because incomes are stagnating or falling. The integration of the world economy has boosted productivity and wealth creation in the United States and much of the rest of the world. But within many countries, and certainly within the United States, the benefits of this integration have been unevenly distributed -- and this fact is increasingly being recognized. Individuals are asking themselves, "Is globalization good for me?" and, in a growing number of cases, arriving at the conclusion that it is not.

They point in particular to falling incomes for every category of education except for holders of PhDs and professional degrees, and the corresponding feeling of economic insecurity that they argue jeopardizes the sustainability of the new capitalist order. Accordingly, they criticize the inadequate response of public officials to this sense of insecurity — the failure of governments to explain the virtues of the new age while simultaneously initiating policies that will ease the fears of anxious publics and try to provide individuals with the tools to compete.

Meanwhile, in the FT Martin Wolf lays out how the "permanent revolution" that is capitalism is transforming industrial capitalism into something else (he calls it, perhaps channeling Rudolf Hilferding, global financial capitalism, but that strikes me as too limited a term, because the impact of the decoupling of wealth creation from the production of tangible goods is and will continue to be wide reaching, throughout societies). Wolf is definitely worth reading, because he outlines the extent of the transformation underway, the extraordinary changes that have left publics scared and governments overwhelmed. The benefits, as Wolf notes, are substantial, but if they are to be preserved and expanded governments need to act to disarm public opposition and build a new regulatory framework, in the same manner that countries developed a regulatory framework for the industrial age.

As Harvard's Dani Rodrik notes in a comment on Wolf's analysis, "The problem, at its root, is the incompatibility between global finance and fragmentation of political sovereignty at the national level. Domestic finance could be tamed in the previous century through national institutions (regulation, legislation, central banks, and so on). Global finance, to work well and safely, requires institutions similarly global in scope. The chance that these global institutions can be created is, well, nil—at least in our time."

Based on the thinking of elected officials in not only the US, but also in Japan and Europe, I must share Rodrik's skepticism. It seems that few officials quite realize the extent of the change underway. They remain stuck in the industrial age, content to jury rig old institutions rather than imagine new post-industrial institutions. As such, public opposition, in the form of protectionism, will undoubtedly continue to grow. What I am curious about is how that opposition will metastasize into more formal opposition, reminiscent of the late nineteenth century's Grangers and Populists. In fact, I am amazed that John Edwards seems to be the only candidate actively trying to tap into growing fear and resentment.

So the question is whether the heralds of "global financial capitalism" — to whom state intervention is largely anathema — will be flexible enough to embrace some form of social protection as a way to disarm and undermine more potent opposition to the post-industrial order.

Pooling reserves in Asia

The Yomiuri Shimbun's lead editorial today focuses on an agreement reached at the annual meeting of the Asian Development Bank (ABD) to pool currency reserves among the ASEAN + 3 countries so to be able to provide liquidity in the event of a crisis.

Building on the Chiang Mai Initiative, an earlier agreement in ASEAN + 3 that provided for bilateral currency swaps in the event of a crisis, this agreement may signal a new phase in Asian regionalism, although, as this Reuters story notes, the details of the arrangement have yet to be solidified.

I think this agreement may be important for a few reasons: it cements the role of ASEAN + 3 as the critical forum in regional cooperation (much to the chagrin of the US, undoubtedly); it reinforces the counter intuitive pattern of integration whereby ASEAN is the hub and the region's giants (Japan, China, and South Korea) are the spokes; and, together with that, it signals to the world that even as Asia stands up a complement (or a rival) to the IMF, Asian integration remains a largely open affair.

While I think the first two points are probably uncontroversial, the last may require some teasing out.

The key point is that ASEAN is the hub. Because ASEAN, a group of smaller, poorer countries dwarfed by the great powers of Northeast Asia is the hub of regional integration arrangements, there is less of a "Fortress Asia" feel to ASEAN + 3 cooperation than there might otherwise have been if it was occurring under the aegis of China or Japan. With Japan and China cancelling out each other's influence within the grouping, ASEAN has been free to push for a more open environment. ASEAN's thrust — and thus the thrust of ASEAN + 3 initiatives — is largely outward.

Look at ASEAN's recent activities. It has recently opened FTA negotiations with the EU and CEP negotiations with Japan, while continuing with CEP negotiations with the PRC and pushing ahead with the liberalization of markets within ASEAN.

One can argue about whether these agreements are trade-creating or trade-distorting, but the politics of ASEAN-centered regionalism suggest a more dynamic, commercial regionalism than Europe's inward-looking, institution-building regionalism. As numerous commentators have observed, the conditions of Asia make European-style integration unlikely.

The relationship of the ASEAN + 3 pool to the IMF remains to be decided — Yomiuri suggests that it will be complementary — but that relationship will say much about how power has shifted to Asia in the decade since the Asian contagion. As such, even as the region becomes more open to global commerce, it may become less friendly to international financial institutions perceived as harmful to "Asian" interests.

While it is too early to say more about this arrangement, seeing as how it remains inchoate, it is, unmistakably, an important step in Asian regionalism — and a sign of the growing wealth, power, and independence of Asian countries (and not just China).