Finding Past Parallels In Economic Mess
MADELEINE BRAND, host:
Treasury Secretary Geithner says the years he spent as an attache to the U.S. embassy in Tokyo taught him valuable lessons about economic recovery. Since its real-estate bubble burst in the late 1980s, the Japanese have failed to get their economy back on track. In fact, recently, the head of the Japanese Central Bank says the country is experiencing an unimaginable contraction. Adam Posen is the deputy director of the Peterson Institute for International Economics, and he studies the Japanese economy. And first, if you would, run down for us the characteristics of the Japanese crisis, and I understand that now, for the first time, they're confronting rising homelessness, a vanishing social safety net; almost unthinkable for Japanese, right?
Dr. ADAM S. POSEN (Deputy Director, Peter G. Peterson Institute for International Economics): Yes, although I think there's a tendency to over dramatize it. What Tim Geithner identified and essentially started his noticeable career by seeing that Japan's problems were serious in the early '90s was something that lasted about a decade, until 2002. And it was a period of very slow growth, very low investment, of rising unemployment, and all connected with banking problems as well as very passive government action.
But what's interesting is in 2001, a new prime minister came in, Junichiro Koizumi, and he appointed his own - sort of like Larry Summers now, his own czar of economic policy, a former professor, Heizo Takenaka, and they completely reversed the Japanese policy mistakes of the '90s. They were very tough on the banks in terms of re-capitalizing. They were very aggressive in fiscal stimulus. And Japan, despite your lead-in, actually grew pretty strongly from 2002 through 2008. Of late, things have turned worse again. Japan is experiencing some disruptions it never has before, because they've now had a lot of temporary workers and non-part-time workers and all kinds of what we call low-attachment labor force. I would just point out, though, that Japan right now isn't suffering because of problems inside Japan; Japan right now is caught up in the global crisis.
BRAND: So, to get out of its previous problems beginning in 1989, it embarked on a massive stimulus program, where the government spent trillions on public-works programs, bridges, dams, roads, et cetera. Did it work?
Dr. POSEN: Again, I'm sorry to be a bit argumentative, but the facts have been distorted. Japan claimed they were doing a very big public-spending program starting in '89. They claimed they were going to do all the stuff working with their equivalent of the state and local governments. And in the end, they spent very little money, or whenever they spent the money, they offset it by increasing taxes. It did work in the sense that, in 1998, and then again in 2001, 2002, when they really did do stimulus and they didn't offset it with taxes and they didn't force the states to put up money they didn't have, it actually did expand the economy.
BRAND: So, Tim Geithner has looked at that, and he has come to what conclusion?
Dr. POSEN: Well, I can't read Tim's mind, but based on past conversations with Secretary Geithner, he's come to a couple conclusions. First conclusion is you have to be out in front of events; you can't let them build up momentum. And that's part of the thinking that was at the Federal Reserve. Ben Bernanke, the chairman there, has also studied the Japan case and has that view as well. So, you want to be stimulating things aggressively. The second thing that, I think, Geithner learned from the Japan case is you can't - you do have to clean up the banks. You can do stimulus; it will buy you time, but you won't have a sustained private-sector recovery after the stimulus runs out unless you've cleaned up the banks.
BRAND: You know, I think a lot of people would be surprised by what you just said, that they didn't spend enough on the public-works program, because it seemed like almost every aspect of Japanese society was touched by government spending, at least during the 1990s. And I'm wondering, was the money spent on the wrong projects? In other words, should they have not spent so much on roads, on dams and bridges and spent more on, let's say, education?
Dr. POSEN: When you look at the Japan experience, what they tell you is, A, you want to do things that don't affect only one part of the country, for various political reasons. So, imagine if instead of Montana having two senators, despite having a tiny population, in Japan, the equivalent of Montana has six senators. And New York City, instead of having relatively few representatives by comparison, Tokyo has half as many representatives as New York City. And so, all the public-works spending in Japan tended to be thrown into the rural areas, directed at farmers - and that's even crazier for them; they have lots more farmers than we do. And so, the money was wasted. But ultimately, the big thing wasn't so much the structure of the stimulus; it was this insistence they had based on bureaucrats in - very powerful bureaucrats in the finance ministry who never wanted to go into deficit.
BRAND: You're saying now that Japan's problems are really caught up with the world economic situation. So, in essence, will they have to basically follow what happens here in the United States to try to clean up their banking system, or can they do anything differently?
Dr. POSEN: It's very interesting, in some ways, heartening, that since Koizumi and Takenaka reformed the Japanese Banking System in 2002, 2003, they haven't made many of the same mistakes. So, unlike American banks or British banks or German banks or French banks...
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Dr. POSEN: Or Swiss banks - the whole list goes on - Japanese banks actually bought very little of the toxic stuff; they didn't make that many bad loans. They're just sort of suffering through a very sharp recession. They still have a problem - and this is a good lesson for all of us - that their banks hold a lot of stock in nonfinancial companies. So, when the economy tends to go down, there's this mutually reinforcing accelerator. So, if profits go down at a Toyota or a Honda or a Canon, then the value of the capital, the bank hold, goes down, and then the banks lend less, and then profits go down the rest of the country. And so, that's something they need to think about unwinding, and that's something we should be careful about now, when we talk about having all these assets on banks' books. The global nature, though, is Japan is very dependent on exports, and that number understates how much their production is intergraded with workers here in the U.S. and in China and throughout Asia. So, until China and U.S. recover, it's unlikely for Japan to recover.
BRAND: So, until we start buying Toyota trucks again and consumer electronics, Japan is going to suffer.
Dr. POSEN: Yeah. Although, remember that most Toyota trucks that are sold in the U.S. are built in the U.S. So, not buying Toyota trucks also makes Americans suffer some, too.
Dr. POSEN: But I guess the point I'm trying to make is if you're very dependent on the world economy, then you are, in some sense, victim to things outside your control. And that's what's happening in a range of countries, from Germany and Japan to China, where they were very dependent on the U.S. for demand, and so, when the U.S. turned down, it pulled the rest of the world down with it.
BRAND: Adam Posen is the deputy director of the Peterson Institute for International Economics. Thank you.
Dr. POSEN: Thank you.
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