While I was in Japan the week before last, the country’s economy sank into its fifth recession since the 2008 Financial Crisis. I then flew back to London in time to hear the Chancellor of the Exchequer, George Osborne, deliver an autumn statement filled with good economic news.
On the face of it, Japan and Britain are at opposite ends of an economic spectrum: Japan’s economy is going nowhere, Britain’s back in business. But on closer inspection, the two look like flipsides of the same coin. Both are beset with sluggish productivity, declining population growth — contracting, in Japan’s case — and the consequent rising cost of an aging population. So both countries have started onto the same path of relative decline. Japan has just journeyed further down that road.
For the last couple of years, Japan has been trying to revive its economy with ‘Abenomics,’ the blend of monetary and fiscal stimulus named after Prime Minister Shinzo Abe. It isn’t working. Making money cheap and abundant is supposed to get people spending, thereby prompting businesses to invest to meet the rising demand. But if the long-term outlook is for low growth, everyone tends to stash the money under mattresses in anticipation of the next rainy day. Firms do likewise and, preparing for the next recession or crisis, hoard their cash. That’s pretty much what’s happening in Japan, as consumers and firms hoard cash. Inflation has risen a tad — an outcome Abenomics aims for since the reasoning is that if prices are rising, everyone will go shopping today to avoid getting dinged with higher prices tomorrow. But in fact, the principal effect of higher inflation appears to have been to erode living standards for employed workers, whose wages are rising slower than inflation.
Japan’s disappointing experience hasn’t been unique. On the contrary, it’s been much the way in all Western societies that have been trying to overcome the Great Recession with monetary policies. Unlike Japan, which has opened the government’s purse-strings and at the same time made money cheap and abundant, European and North American countries have tried an odd blend of loosening money supply but tightening purse-strings. George Osborne’s Britain is the poster-boy for this hitherto unusual strategy, as the government cuts spending so as to shrink the size of government. While the Bank of England keeps interest rates low and floods the country with cheap money, the government is trying to reduce its expenditure to a level not seen since the end of the Second World War. In theory, the resulting reduction in taxes and government borrowing will free all that money for consumers to spend and businesses to invest.
Unfortunately, it isn’t working that way. Sure, compared to most Western countries, the British economy is performing pretty well, its 2+% GDP growth rate looking pretty good next to Europe’s and Japan’s relative stagnation. But to say this makes it a dynamic economy is a bit like saying Kourtney is the smart Kardashian. Yeah, but, compared to what? Moreover, the composition of GDP growth reveals how fragile the British economy remains, with manufacturing contracting and only the service sector keeping the economy ticking over.
And what’s driving that service-sector growth? Cheap money, which is encouraging anyone with cash to invest to put it into real estate. This has created a virtuous cycle for property-owners, and a pretty vicious cycle for renters: as more people buy, prices rise, which makes it harder for renters to become buyers; and since prices are rising, their landlords can jack up their rents — boosting their returns and enabling them to buy yet more property.
In an ideal world, young people, who should be providing the entrepreneurial energy and labour that will build the economy of the future — the ‘March of the Makers’ which Chancellor Osborne says he is trying to bring about — should be getting the breaks that enable them to put their time and capital to work building that future. Instead, young people are forced to use all their energy and scarce income just to get by, and it’s the comparatively unproductive retired population who are soaking up the economy’s resources. And that’s pretty much the Japan scenario — a country with a glorious economic past but a relatively dispiriting future.
Such ‘bubblenomics’ resembles a pyramid-scheme: the money keeps flowing out of the investment scheme for as long as new money flows in. But it can’t go on forever. Meanwhile, as I will write another day, this economic strategy is doing serious harm to the economy’s productive capacity, making Britain even more vulnerable to the next crisis when it comes — which it will certainly do.
George Osborne seems to get this. The decision announced in the Autumn Statement to raise taxes on buy-to-let properties seems destined to let some of the steam out of the property market, discouraging the accumulation of real estate by rich retirees and giving younger Britons a chance to get onto the property ladder. Who knows, that might even prompt the crash to come sooner rather than later. Although not a likely outcome, such an eventuality would actually do the British economy a favour, exposing the unsustainability of bubblenomics as a strategy and forcing a genuine debate about the options.
But the basic problem is that, as is the case with Japan’s Abenomics, Osborne has few strategies to offer other than bubblenomics. The Chancellor actually has a few good ideas, but the close ties of the ruling Conservatives to the financial sector, for whom bubblenomics is the only show in town — if it weren’t, banks would be lending to upstart businesses rather than real-estate investors –make it unlikely he can do more than nibble at the margins of their dominance. And as a recent paper by the Bank for International Settlements argued, when you have a financial sector as big and powerful as Britain’s, the rest of the economy is bound to suffer.
And that’s a story for another day.