3 out of 5 Arrows: Japan’s Abenomics
by John Brian Shannon | April 29, 2016
If the fundamentals of an economy are sound, any conceivable shock to an economy will eventually dissipate and normal economic flows will resume. (Every economist knows this)
Unfortunately for Prime Minister Shinzo Abe of Japan he inherited an economy where the fundamentals were unsound, and more than one economic parameter was out of alignment. Which is a different way of saying the Japanese economy was going to fail on his watch or during the next Prime Minister’s watch.
The Fukushima-Daiichi meltdown and the subsequent closure of Japan’s nuclear power plants massively shocked Japan’s economy. Some 29 percent of Japan’s electricity was produced by those (cheap to operate) nuclear power plants. Many of the country’s n-plants are now undergoing decommissioning or remain offline.
Mr. Abe’s Three Arrow policies were necessary, timely, and for what they are, effective. In retrospect, there was no other way for Japan to proceed. The country’s economy would have imploded had the Prime Minister not acted so appropriately.
When Prime Minister Shinzo Abe took office in December 2012, he announced a strategy – comprising three “arrows” – to overcome the economy’s combination of slow growth and low inflation: [1] very easy monetary policy, [2] a short-term fiscal stimulus, and [3] structural reforms to labor and product markets. But the government’s economic policies (so-called Abenomics) have not fixed Japan’s problems and are unlikely to do so in the future.” — Professor Martin Feldstein writing in Project Syndicate
However, I suspect that even Shinzo Abe knew it would take more than Three Arrows to reset Japan’s economy. But they were a great start to putting Japan’s economic fundamentals where they need to be.
It will take two more ‘Arrows’ to return Japan to a balanced state — ‘the steady state’ where a fundamentally sound economy can withstand moderate economic shocks.
Mt Fuji from Yokohama, Japan. Image courtesy of comeonoutjapan.com
Arrow #4 must surely be an inheritance tax of some significance. Japan’s diminishing population pyramid means that domestic demand will continue to taper. An inheritance tax can help to counter that loss in government revenue.
With falling tax revenue due to a shrinking population, the government needs money to operate — providing the same infrastructure, but to a shrinking population. In Japan’s case an inheritance tax of 25%-50% will allow the government to maintain services in the face of falling income tax and other tax revenues due to a rapidly declining population.
Understanding the Population Structure in Japan 1960-2060.
Arrow #5 must be raising corporate taxes. If voters are expected to shoulder a higher tax burden then corporations must also pay their fair share. If that means that dividends for wealthy investors are a few cents lower, well, that’s just too bad.
Voters will not accept the twin assault of higher inheritance taxes and the (proposed) Value Added Tax increase from 8% to 10%. That will only result in widespread public disaffection and PM Shinzo Abe being voted out of office after doing so much good work.
By raising inheritance taxes and corporate taxes, the government could hit zero-deficit within 3 years.
At that point the Japanese economy will return to a ‘steady state’ where it can flourish as a fully functioning economy.
Although I’m a fan of massive stimulus; At the early onset of economic downturns, massive government intervention works well, but by continuing to massively stimulate an economy for more than 5 years, we reach a point of diminishing returns in the 6th or 7th year.
That is why, in order for government intervention to be most effective, it must be massive, it must be early, and it must continue for 5 years or less. (Less is better)
Other economic levers must also be applied. We can’t expect stimulus alone to solve the fundamental problems with the economy.
If an economy hasn’t got it’s fundamentals in order, massive stimulus only warps the equation — but in fairness — it gives the country’s leaders five years to get those fundamentals in order.
Therefore, my prescription for Japan’s ailing economy is ‘take two more arrows and aim for zero deficit within 3 years.’
Prime Minister Shinzo Abe has the credibility and the political energy to get it done. Leaving it for the next Japanese Prime Minister isn’t an option.
Related Articles:
- Japan’s Economic Quandary (Project Syndicate)
- 3 Economic Challenges Japan Faces in 2016 (Investopedia)
- Rescue Helicopters for Stranded Economies (Project Syndicate)
‘Free Riders’ or ‘A New Hope’?
by John Brian Shannon | April 27, 2016
In a recent interview, President Barack Obama called some U.S. allies “free riders” in regards to perceived American largesse, but supposedly “cleared the air” while meeting with King Salman of Saudi Arabia at the April 20th Gulf Cooperation Council meeting in Riyadh, Saudi Arabia.
Now that one side has ‘cleared the air’ let’s allow the other side to share their grievances publicly — except they won’t because there is danger in that for them — and also because ‘it’s just not done’ diplomatically-speaking.
FACT: From 1932 through 1973 (in almost every year) the U.S.A. purchased Saudi oil at a price lower than the cost of production.
Yes, you read that correctly. For most of 41 years, Saudi Arabia massively subsidized the American economy by selling it’s oil for lower than the cost of production. (“Otherwise, the West will lose the Cold War.”) Does everybody understand how that card was played?
I’d call that a very big debt.
(Yes, such treatment ultimately led to the Arab Oil Embargo, although events surrounding Israel were cast as the publicly-stated reason for the Embargo. ‘Those in the know’ at that time are very well aware of this and it’s an open secret among historians and the people who were present in the halls of power in that era)
FACT: During the Cold War, Saudi Arabia mounted more Cold War operations against the former Soviet Union than all other countries combined. (Let that one sink in for a moment!) Saudi Arabia’s Cold War operations against the Soviets were second only to the United States — and countless operations were joint U.S./Saudi operations.
I’d call that a very large debt.
FACT: During the massive Soviet invasion of Afghanistan in the 1980’s, the CIA, Pakistan’s ISI, and the Saudis combined forces to evict America’s #1 enemy the former Soviet Union from Afghanistan. (See the movie, ‘Charlie Wilson’s War’ which isn’t far off the truth — except it misses the point that Saudi Arabia paid for the whole effort)
The CIA provided a dazzling array of options (technical support, 3rd-rate new or refurbished weapons, realtime satellite intelligence to designated ‘advisors’ on the ground, and cover) while the ISI provided transport, shelter, fighters, and other logistical capabilities.
(In retrospect, in exchange for *being allowed* to get a reasonable price for their oil, it almost looks like Saudi Arabia was expected to shoulder the entire cost of the Soviet/Afghanistan war. Which probably removed most of whatever profits they had hoped to achieve from the new, post-Embargo oil price that the Saudis were *allowed* to charge)
Another big debt to Saudi Arabia.
FACT: “Saudi Arabia has *executed* more terrorists than the U.S. has ever *captured*.” (That was true until 2004, but it was a common refrain until then)
Yes, in Saudi Arabia, when they catch terrorists, they generally execute them with little fanfare. Good riddance!
Saudi Arabia has passed onto the United States intelligence agencies more information about terrorist individuals than any other country.
Of course, U.S. intelligence agencies and some law enforcement units are only too happy to take the credit for apprehending such terrorists, rendering them abroad, incarcerating them without trial, and then casting vague aspersions at Saudi Arabian culture for (possibly) creating them.
Which works quite well, I must say. It has kept the Saudis busy trying to dig themselves out of a contrived hole — a hole contrived by some Western intelligence agencies in order to keep the Saudis quiet about all the free riders Saudi Arabia has given the West since 1932.
I’d call that a moderate debt to the Saudis.
It’s interesting that there was little ‘Islamic terrorism’ prior to the Soviet/Afghan War. And what there had been, was tiny bits of terrorism scattered around Asia and the Middle East. (Usually it was a case of personal attacks — one warlord against another)
But there is a reason for the rise of Islamic Terrorism and we in the West, helped create it.
Instead of castigating people for being ‘free riders’ — trying to keep them ‘down’ and ‘on the defensive’ — we should be meeting every country ‘where it is’ and helping them to destroy terrorist networks and individual terrorists wherever they may be on the planet.
That’s the difference between managing a problem on the one hand and scoping out a much broader, more inclusive, and cooperative vision on the other hand — one that has an infinitely better chance of success.
Finally, terrorism didn’t suddenly just happen. We in the West helped to create it during the Soviet/Afghan War with CIA training, the ISI’s training, and Saudi money.
When our allies the brave Mujahadeen sometimes called the West’s freedom fighters returned home to places like Yemen, Saudi Arabia, Iraq, and other Middle Eastern nations, their particular indoctrination did not simply vanish…
A New Hope
We need a better vision — one that is at least one order of magnitude better — for dealing with what is probably going to become a widespread problem in this world, with many Western-educated young people joining such groups.
Yes, thousands of Western non-Muslims are joining ISIS and other groups — and in the future it’s likely that other groups will arise with even more tantalizing ideologies (at least to easily-swayed and ‘out-of-place’ young people) who feel they haven’t a real chance at fulfilling their potential in our world.
Every one of our young people who leaves to join such a group represents a massive failure on the part of our society.
And we will only have ourselves to blame for what comes after — whatever that may be.
Therefore, let us put our efforts into providing real opportunities for our young people, and with some urgency, create employment opportunities in the Middle East where the youth unemployment rate ranges from 29% (Saudi Arabia) to 24.8% in Egypt and worse, in rural areas.
Young people from any country with a promising future ahead of them, do not run away from their communities to join groups like ISIS. Providing the opportunity for a real future for young people is where we must put our best effort — and we can’t afford to waste a moment in support of that important goal.
Related Articles:
Brexit? Or Brexit + Enhanced Commonwealth?
by John Brian Shannon | April 22, 2016
When a thing isn’t working, it’s time to quit. Whether it’s a marriage or a political union there comes a time to say a respectful ‘goodbye’.
And it appears howevermuch joining the EU has propelled the UK economy, the social cost of millions of eastern European economic migrants and Levant refugees streaming into the UK is higher than British citizens are comfortable with.
The raison d’être for the creation of the EU is quite wonderful — inspired even. But there can be a difference between the theory of a thing and what has actually occurred.
Sir Winston S. Churchill was an inspirational statesman, writer, orator and leader who led Britain to victory in World War II. He served as Conservative Prime Minister twice – from 1940 to 1945 and from 1951 to 1955. Gov.uk
Scary statistics have been trotted out in order to push Brit citizens into voting to stay in the EU, but when analyzed turn out to be speculative at best.
It looks like the EU project is in trouble. I wish them well, and I hope they solve their problems.
In the meantime, the UK must do what is best for the UK. And in my opinion, that means they should get out now, and invite the Scandinavian nations and Ireland to join The Commonwealth with the goal of increasing economic and social integration with those sovereign northern European nations. (The Scandinavian nations are gone anyway as far as EU membership is concerned. As soon as the first opportunity appears that meets optics standards, they’ll quit the EU)
If the UK, the Scandinavian countries, and Ireland form a loose economic and social cooperative union (or become members of a re-energized Commonwealth) it will immediately boost economic and social metrics across those nations, without the downsides of EU membership.
Without wishing any harm to the EU; The European Union can better concentrate on southern European issues with Germany and France leading the way, and without northern European concerns to complicate things.
I wouldn’t rule out a future UK/Scandinavian nations/Ireland bid (as one bloc) to accede to the EU once things have stabilized there.
But for now, the United Kingdom and northern European countries can do better by joining The Commonwealth and working towards interdependent socio-economic success.
The question is; Do we choose ‘safe’ or do we choose ‘Carpe Diem’?
The European Union is deep in it’s own problems for the foreseeable future, and in that context I make the case for the UK to leave the EU. As there’s no precedent for the Brexit situation it could now become anything the UK government wants it to become.
How about this?
- The UK leaves the EU and adopts a similar relationship to the EU, as Norway presently enjoys.
- The UK invites all Scandinavian nations and Ireland to become part of The Commonwealth.
- The UK institutes a 1% Tobin Tax, keeping one-quarter of one percent for administrative purposes, and remits the remaining three-quarters of one percent to the IMF — to be held in a special account that only the UK government can spend on the UK and other Commonwealth nations.
- Every Commonwealth nation should phase-in a 1% Tobin Tax over a 5-year period. And just as in the UK, one-quarter of one percent would be retained by each Commonwealth nation to cover collection and administration costs of the Tobin Tax.
- It’s obvious that perhaps a trillion pounds of Tobin Tax revenue would accrue quickly — and be available to each Commonwealth nation to spend in any other Commonwealth nation. (Need a new SASOL headquarters with a London address? Perhaps you need to double the export capacity in the port of Accra? Or, with the proper funding you can finally build that 1 GigaWatt wind farm and export billions of dollars/pounds/rands worth of electricity to neighbouring countries. Now you have instant funding!)
- If you’re the UK there’s one thing you want, countries lining up to join The Commonwealth! And within 5-years of joining The Commonwealth, beginning to contribute their own Tobin Tax revenue to the special IMF account which is only used to strengthen trade links with other Commonwealth economies.
- The ultimate goal of course, would be for the entire Commonwealth to copy the Norwegian economic model (as uniformly as possible) in order to attain Norway’s enviable statistics — such as the world’s highest per capita income, among the world’s highest productivity, free university for all citizens and residents, free universal healthcare ranked almost as highly as the UK healthcare system, and so much more. (Keep in mind Norway’s #1 ranking on the Social Progress Index (SPI) and very high ranking on the UN Happiness Index. And remember, all positive indicators flow from those two stats, not the other way around)
The question would then become; “Which country wouldn’t want to join The Commonwealth?”
A UK exit (Brexit) from the European Union could now become anything the UK wants it to become. Commonwealth countries (in green colour) plus Scandinavian countries and Ireland (in blue colour) Image courtesy of maproom.org
In this, the 21st-century, it should never be a case of looking at a glass, half-full. It should always be about creating a massively better system; One that is a whole order of magnitude better than the presently sputtering economic model.
Previous generations of politicians rose to meet the challenges of their time, and likewise the UK government must also rise to the so-called challenges of our time.
But meeting the challenges of our time must be considered passé as the UK is sufficiently advanced that it should blow past the challenges of our time — in the same way a Bentley Mulsanne Speed blows past a Trabant on the M6 motorway.
Who Should Lead an Economically-Empowered Commonwealth?
Whomever is the most recently dismissed Prime Minister of any Commonwealth country should (within 180 days of losing office) be given the top job — Secretary General of The Commonwealth.
In that way, a flow of different approaches from highly empowered and knowledgeable people will lead The Commonwealth of Nations and each former PM will undoubtedly leave their stamp on the broad policies of that organization.
A former Indian Prime Minister sitting as Secretary General might advance the cause of microgrid power generation across all developing Commonwealth nations, while the next SecGen (from the UK for example) might take up the cause of getting resources from all Commonwealth nations to China and other major markets. And during the time of an African Secretary General of The Commonwealth, the preferred cause might be improvement of all Commonwealth port facilities in order to dramatically expedite trade — getting Commonwealth goods to every market, faster, fresher, and better.
What matters to me, is that each Secretary General leaves a positive impact on The Commonwealth using his or her unique worldview, experience, contacts, and ability.
It will be this synergy that will make The Commonwealth all that it can and should be.
The Commonwealth of Nations is a group of interdependent countries.
“The Commonwealth is a name for countries which were part of the British Empire before they became independent. This group of states works together on many important matters, like business, health and the fight against poverty.” — Wikipedia
Related Articles:
- Should Britain Leave the EU? (Project Syndicate)
- A British Bridge for a Divided Europe (Project Syndicate)
