Japan’s Abenomics: 3 out of 5 Arrows

by John Brian Shannon originally published at JohnBrianShannon.com

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 early into the next Prime Minister’s watch.

The unexpected shock of the Fukushima-Daiichi meltdown and the subsequent shuttering of Japan’s entire nuclear power plant fleet didn’t help Japan’s economic matters. Some 29% of Japan’s electricity was produced by those (cheap to operate) nuclear power plants. Many of those n-plants are now undergoing decommissioning, or are still 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 that it would take more than Three Arrows to reset Japan’s economy. But they are 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 political or economic shocks.

Mt Fuji from Yokohama, Japan. Image courtesy of comeonoutjapan com
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.

Arrow #5 must be raising corporate taxes. Voters will not accept the twin assault of higher inheritance taxes and an already proposed Value Added Tax increase from 8% to 10%.

That will only result in widespread public disaffection and Prime Minister Abe being voted out of office after doing so much good work.

If voters are expected to shoulder a higher tax burden then corporations must also pay their fair share. If that means that corporate dividends for wealthy investors are a few cents lower, well, that’s just too bad.

By raising inheritance taxes and corporate taxes, the government should 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 continuing to massively stimulate an economy for longer 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 to solve fundamental problems with the economy.

If the 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.

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A Time for Tariffs in the Globalized World?

by John Brian Shannon
(Originally published at JohnBrianShannon.com)

A long time ago when there were unicorns, there was a justifiable need for international trade agreements to spur trade, increase movement of capital flows and to promote movement of labour — but mainly to gain access to potentially larger markets in both developed and developing nations.

International trade agreements like NAFTA and even today’s TPP are throwbacks to a day when we didn’t have all of that. Many global economies then were practically closed markets, with few exceptions.

It’s almost the opposite these days — globalization has certainly prevailed — and it’s the rare country that isn’t buying or selling wares from around the world on a daily basis.

North Korea is a closed market, so is Japan (nominally) although it is a huge exporter, and only a handful of other countries could be considered ‘closed markets’ in any substantive sense.

In your home country you can probably buy a car, a music player, clothing, food, and almost anything else — and it likely wasn’t built, created, or grown, in your country.

Globalization has succeeded wildly and we now live in a globalized world.

How’s it working?

For the people in developed nations it has meant 25-years of inexpensive goods on store shelves — goods that were either built, created, or grown, in developing nations, which has been a real bonus for developed world consumers — and it has also benefited workers in the developing world.

Unfortunately, it also led to many high-paying jobs being sent overseas, resulting in higher unemployment and worse social ills than that in some developed nations.

Liberalized international trade has become all that it could be

Which is fine. It’s served it’s purpose and we now have open markets around the world with levelization of trade, capital, knowledge, labour, and general market equilibrium — if not market symbiosis.

But there isn’t much more room for globalization to grow. Other than tidying-up some intellectual and property rights regulations, we’ve arrived at our free trade destination. We’re already living in the globalized economy.

Where do we go from here?

There are a number of things that can strengthen our domestic economies without turning back the clock to the (almost) closed economics of the 1960’s.

Ten Ways to Make Our Country Better and Stronger – While Helping Citizens to Succeed and Live Happier Lives

The Ten Ways: Increasing Intellectual Rights, Increasing Government Revenue Streams, Preventing Obscene Government Debt, and Enhanced Government Services Designed to Move the Bottom Economic Quintiles Towards Middle Income Status

  1. We and our trade partners — should sign a simple trade agreement to protect intellectual property rights, one that includes universal patent, trademark and copyright protections. The point is to get it done now while it is still relevant. There’s no point in bothering with it if we wait, as all the secrets (the patents, trademarks and copyrights) will be ‘out of the box’ and in the general marketplace. (The rule must be that we don’t trade with nations that won’t sign and abide by those laws)
  2. We and every country we trade with — should pass legislation to allow a simple 5% tariff on every imported and exported good — from supertankers full of oil, to consumer electronics, to clothing — in short, everything. This simple tariff would replace all other import and export taxes/tariffs/levies and related charges. Billions of dollars of goods are imported and exported every month and the tariff revenue stream can be used by the federal government; To improve productivity by funding R&D, and to improve government services and infrastructure — or used to raise national GDP and quality of life for citizens, by reducing unemployment and to lower taxes on the poor and working poor.
  3. We and our trade partners that don’t already have a national Goods and Services Tax (of 7% for example) on all retail goods — should implement one immediately. This revenue can contribute to the overall economy to improve services and infrastructure, reduce unemployment, and lower taxes on the poor and working poor, and should be shared 50/50 with states or provinces — who after all, would be the parties responsible for collecting it.
  4. We, and every country we trade with — should pass legislation making deficits of more than 4% of GDP illegal, at the federal, state, and municipal level. This prevents obscene government spending and prevents the trap of eternal debt servicing costs, once interest rates rise. Which they always do.
  5. Our own country and every country that we trade with — should no longer charge income tax on those who earn less than the equivalent of $25,000. per year.
  6. We and our trade partners — should pass legislation to the effect that every worker has the right to a minimum of 25 weeks of full-time employment, per year. Yes, it would require a job-sharing programme managed at the state level. Some workers may receive layoff notices in order to accommodate unemployed workers. On the positive side, long-term unemployed people could then contribute to the economy (and to their own personal income!) for a minimum of 25 weeks per year. In countries like Sweden, this is common in industries that can’t keep all of their workers employed, and it is normal for two workers to share the same job for many years (6 months ‘on’ and 6 months ‘off’) so that over the course of a year, every worker in the country will have worked a minimum of 6 months. Which keeps their skills sharp, makes them eligible for automatic unemployment insurance benefits during their layoff, and lowers the welfare rate to near-zero.
  7. Most government unemployment insurance programmes around the world pay 66% of a worker’s salary during periods of unemployment, often after a significant wait and a worker’s claim can be turned down for any number of strange reasons. It’s inhuman. Workers pay into unemployment insurance — it’s not their fault that there are millions more people looking for work than there are jobs available — because their jobs have been sent overseas since the advent of globalization. In some countries, a brilliant solution exists whereby workers can opt to pay into a private unemployment insurance programme, one that can top-up their unemployment insurance payments to 99% of their normal salary for the equivalent of 1 or 2 cents per dollar earned. The employee merely indicates how much extra unemployment insurance coverage he or she wants to purchase, and the deductions are automatically made from their wages and directed to the private unemployment insurance company. The private insurer also begins paying unemployment benefits from the first day of a worker’s layoff. Workers no longer need subsist on 66% of their normal income while unemployed. (Imagine working in the fast-food industry, living on subsistence wages, then getting laid off due to a slowing economy, and then having to exist on only 66% of your already subsistence-level wage!) NOTE: In Sweden, both the government-run unemployment insurance plan and the private unemployment insurance plan make a respectable profit, every year. That’s how easy it is to do, when it’s done properly.
  8. Every city, town, village or county in the country should have the option to receive a free website from the federal government — for as long as certain information is continuously updated by the local jurisdiction. Simply by typing in the name of a jurisdiction into a search engine, anyone should be able to find the local time, weather, federal, state, city, village or municipal phone numbers and addresses, emergency services and other essential services (like Hospitals and Veterinary Clinics) and employment information for that city, town, or region. Standardization is key so that workers looking for work, or visitors to a region can quickly navigate to and access important services without a frustrating search (or fruitless search, because not all jurisdictions have their own site or mobile-friendly site — but you don’t know that until you do an hour’s searching and discover that there isn’t one!) Quick access to important phone numbers and addresses can save lives and help to increase productivity.
  9. Streamlined government websites for self-employed people to set-up and begin working in one day with a minimum of confusion, stress and red-tape.
  10. Legislation to require internet service providers to provide basic internet plans of $10. per month with low entry barriers — enough to check emails, find a job, find rental accommodation, and perhaps practice the preferred local language in hopes of finding a job. The internet is an essential service in our era, and those entering the workforce or returning to work after illness, etc. need to be able to start somewhere.

It’s easy to look around the world to see what’s working well in other jurisdictions and write similar legislation.

Legislators in Sweden and Norway don’t have two brains nor any other super powers, that we know of. If they can manage to get these things done, so can we. And if we can’t, we’re not half as great as we imagine ourselves to be.

But we are! Therefore, all we lack is the will to act. So let us act, and help our country to leap forward by one order of magnitude.


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A Time for Structural Reform at the IMF?

by John Brian Shannon | Originally posted at JohnBrianShannon.com

Recently, it has been posited that the IMF needs structural reforms to make it more responsive to the needs of developing nations by removing the prominent position of the International Monetary Fund’s major shareholders.

“For their own sake – and that of an institution that is needed today more than ever – the Fund’s major shareholders must leave the building.” — Professor Ashoka Mody (Project Syndicate)

In the absence of a better IMF vision, that would surely be the plan. Everything is right about it, there is nothing better to be done.

The International Monetary Fund (IMF)

But in the presence of a visionary plan for the IMF and a ramping-up of it’s mission by one order of magnitude, depowering the Fund’s major shareholders from their overarching role must be considered ‘Plan B’.

Meaningful IMF Reform

If the IMF, it’s benefactors, supporters, and beneficiaries can agree to implement a 1% Tobin Tax within their respective jurisdictions, with the proceeds used to fund IMF operations then the International Monetary Fund will become one order of magnitude more effective, and this must become our logical ‘Plan A’.

Nations contributing their quarterly Tobin Tax proceeds (minus uniform administration fees) would thenceforth receive robust International Monetary Fund support including proactive advice and assistance. (Think: ‘Someone to Watch Over Me’)

Both minor and major shareholders would remain within the International Monetary Fund membership via their respective Tobin Tax contributions.

By displacing the present funding scheme with a universal, members-only Tobin Tax funding scheme, the IMF would suddenly have single-digit trillions of dollars available to help it advance member economies.

Yes, it is bold and daring. And yes, a lot of money could accrue. And on account of that, the International Monetary Fund would need to become proactive, sending targeted assistance on a ‘just-in-time delivery’ basis — with easy repayment terms for developing nations.

If generous IMF funding for job creation exists, national economies will suddenly find themselves structurally sound in months instead of decades, and therefore, require lower levels of future assistance.

I’m not for a minute suggesting, throwing shiploads of money at problems in an effort to make them disappear because we suddenly have shiploads of money available; Rather, I’m suggesting that such a lucrative funding mechanism could finally allow the IMF to become all that it can and should be, and should have been all along.

Instead of trying to push major donor nations away in an attempt to lessen their influence on today’s very finite IMF funding — why not change the entire conversation to an IMF-members-contribute-via-1%-Tobin-Tax and are thereby generously and proactively assisted by the International Monetary Fund.

The question: How can we afford to fund what needs to be done?’ need never be considered again.

Bonus Graphic

What is the IMF?

Note about Non-Participant IMF Members:

Nations that decide against contributing to the IMF via a national Tobin Tax contribution programme would lose the ability to benefit from the IMF — except in the case where ‘country A’ would pay the IMF directly to ‘survey’ or ‘comment’ or ‘create a report on’ the economy or prospects of ‘country A’.

Job Sharing – The Silver Bullet for the Economy

by John Brian Shannon — reposted from JohnBrianShannon.com

How balancing the economy can give us the best work/life balance.
Or is it the other way around?

By legislating job sharing programmes into existence so that every worker is guaranteed a minimum of 25 weeks of paid work every year, we could solve inequality, poverty, and most social ills.

balance

For those of us fortunate enough to be born in a Western nation, life is mostly about balance, and for our elected leaders it’s about how to achieve balance in the wider economy, and about the kinds of policies we’ll need for the future.

Thus far, our political and economic model has evolved. But let’s never forget that it wasn’t designed, it evolved. Big difference. (It might be the best Model T Ford ever built in history, but it’s still a Model T, if you catch my meaning)

And that’s exactly the conversation that we need to have

Here in North America, it requires only 1% of the workers to produce enough food to feed everyone on the continent. Yet, we see major food distribution problems and it’s getting worse.

With regards to agricultural output and distribution, our North American model is the best ever devised but it is far from perfect. And that is my point, instead of waging trillion dollar wars we should have continued to improve our economic model, and especially in regards to the food distribution aspect.

I don’t think that we should be giving food away for free (except in emergency situations) but there are far too many Food Banks in operation for such an affluent society, and there is constant demand for more of them.

Q: And why do we have this particular symptom that I’ve singled-out for discussion?

A: There are far too many idle hands, and it’s because their jobs picked up and went to Asia — a process that began in 1973.

We could put an end to many social ills by employing every worker for a minimum of 6 months per year

By legislating mandatory job-sharing, every worker in North America would be guaranteed a job appropriate to their particular skillset for a minimum of 25 weeks of full time employment, per year.

That means every worker has a full time job for a minimum of 6 months of every year and is then eligible to receive automatic unemployment insurance benefits during their (short) layoff period.

Mandatory job sharing eliminates the need for ‘Welfare’

We know that long-term unemployed individuals eventually turn to welfare in order to be able to eat, have shelter, etc. once their unemployment insurance payments run out.

We also know that long-term unemployment eventually turns into substance abuse, crime, homelessness, etc.

More crime = bigger policing budgets = bigger insurance claims/higher insurance rates = more citizens injured or terrorized by crime, etc… and all of that is just the symptoms of high unemployment and long-term unemployment, migration to welfare, and changes in the thinking of the individuals in such circumstances (long term depression, withdrawing from society, anger, resentment, and more)

But with mandatory job sharing the yearly unemployment rate would be 0% — that is, over the course of the year, every worker will have worked a minimum of 6 months. However, at any given point throughout the year the nominal unemployment rate would settle at 2.5%-3.0%.

With a job (and full unemployment benefits during layoff) long-term unemployment would become a thing of the past.

Keeping some workers in a permanent state of unemployment brings on an OCEAN of troubles

Job sharing is the answer.

By legislating that every healthy worker can have a job for a minimum of 25 weeks per year, we could solve the worst inequality, poverty, other social ills, and dramatically and positively lower crime rates, insurance rates, policing and court costs, and enjoy a safer, more egalitarian society.

It’s so simple.

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The Economics of Empowerment

Previously published at JohnBrianShannon.com by John Brian Shannon

The Economics of Empowerment: How We Could Add Unimaginable Wealth to Our Civilization by Adopting New Ways of Thinking

There’s a circle centred around a geographical point in Asia where 51% of the world’s people live. That’s 3.6 billion who live in an area only slightly larger than the United States (once you factor-in the land that humans can actually live on)

The 51 Percent Circle.
‘The 51% Circle’ in Asia – where 3.6 billion people live on chunks of arable land that in their totality, aren’t much larger than the U.S.A.

‘The Circle’ has perhaps the widest disparity levels in the world; While some of the people living within that circle have fabulous wealth, others live their entire lives at landfill sites sifting through the flotsam and jetsam in a desperate attempt to find items of value to sell on the street.

Of course, there are disparities all over the Earth but nowhere else are there 3.6 billion people living in relative proximity to each other, some of whom may drive a different Lamborghini each day of the week and fly their personal jets at the weekend to the many exotic resorts in that part of the world, while others live in squalid tents with no water supply nor electricity their entire lives.

If ever there was a region of the Earth where investors might find the most highly motivated workers and many natural resources available to create huge returns on investment, this has got to be it!

In the West, where I live, we are beset by ‘First World Problems’ — it’s a family emergency when little Jimmy doesn’t get EXACTLY the tablet computer he desired for Christmas, or when the pizza delivery driver is 20 minutes late with our pizza. Even more serious is getting stuck in a traffic jam when we’re on our way home from work.

Very. Serious. Problems.

In The Circle, a ‘serious problem’ is when a venomous cobra has killed five people in your tent-city neighbourhood overnight, or when the water supply that is required to sustain human life is suddenly cut off by the authorities or by farmers who divert much of the water for their own use farther upstream, or when the river disappears due to drought.

In some areas of The Circle, once a criminal gang begins operating in your region, your life begins to change on that very day and whatever they decide to do with you, that will be your fate for the rest of your life…

Like the lions of Africa, life is ‘day-to-day’ for alarmingly large numbers of humans caught inside this sometimes cruel circle. At any given moment, a lion in Africa may get killed by hunters/poachers, by competing lions, by a pack of hyenas, or by a stealthy underwater crocodile at the old watering-hole, or any number of other reasons. Shockingly few lions make it to middle age.

And so it is with people who live within most of The Circle. Life is cheap there. You live ‘day-to-day’. If you can’t find a way to make yourself useful or even better, indispensable to someone wealthy — you’re gone.

As I’ve said, it’s a region with highly motivated people and under-developed resources.

Even investors with the worst track record in history should be able to strike it rich almost anywhere within The Circle

If the 20th-Century was ‘all about The Baby Boomers’ and ‘enabling’ their generation to add huge wealth to the Western nation economies by virtue of their buying power (called ‘Disposable Income’ by economists) — we in the 21st-Century might do as well by empowering the people in The Circle to become all that they can and should be…

We’re looking at nothing less than the greatest opportunity to create wealth in the history of the planet — an order of magnitude larger than the baby boomer wealth-creation paradigm

And in so doing, we’ll lift billions of people out of poverty, creating trillions of dollars of new wealth for corporations and dramatically increasing revenue to government coffers, and provide opportunities for ‘Circler’s’ to earn life-changing disposable income.

Instead of the one success story that we hear endlessly trumpeted on headlines everywhere; Apple Computer now worth $1 Trillion Dollars (by virtue of Apple’s decision to choose low-cost manufacturing in China and sales to EVERYWHERE on Earth) we could have dozens or hundreds of similar success stories (and not only in regards to personal electronics, but in many segments of the economy)

As a civilization we can choose to drop this ball or we can choose to make it work for us

The people who live within The Circle are highly motivated to do their part.

All it will take to add trillions of dollars of wealth to the global economy is the empowerment of an already motivated people via the implementation of a more detailed version of this vision, along with courageous political leadership to see it through to its best destiny — a destiny that works for everyone on the planet.

(Or, we could allow mediocrity to rule the day allowing the region to deteriorate, becoming the largest breeding ground for terrorism that the world has ever seen with enough terrorist numbers to seriously impact life on planet Earth — as compared to the relatively minor bits of terrorism we’ve seen emanating from other impoverished regions, thus far)

The West became incredibly rich by empowering The Baby Boomers in the 1945-2000 timeframe and the ‘Boomers’ responded by creating unprecedented wealth and a better standard of life for billions of people.

It’s high time for us to empower The Circle so that they can add their wealth-creation and better-standard-of-life contribution to our shared civilization.

The best time to do that was 20-years ago. The second-best time is now.


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