The Plus One policy

Japan's rapidly falling population has sparked an anguished debate: should the country open itself u

By mid-century, the UN predicts, the population of Japan will have dropped from nearly 130 million to 100 million. This is the largest decline for any developed nation. Japan is not an aberration, but a trailblazer. How it is coping with a shrinking population is being scrutinised by other countries across Asia and Europe that have embarked on the same journey.

In Japan, depopulation has triggered a debate about national priorities. If the country is to continue with business as usual and pursue industrial growth, then the trend needs to be reversed. Yet many have grown weary of the treadmill of economic competitiveness and are using this new demographic shift as an opportunity to discuss a different vision of Japan’s future.

Most politicians are of the opinion that population decline is economically dysfunctional and needs to be corrected, even if they are not sure how. The deputy chief cabinet secretary, Haku­bun Shimomura, has pointed an accusing finger at Japanese women: if only they would “stay at home and raise their children”.

What alarms Shimomura is that Japanese women have, on average, only 1.3 children each. Today Japan’s fertility average is lower than China’s (with an average of 1.6 children), although not quite as low as Taiwan’s (1.1 children). The corresponding figure for the UK is 1.9; while at the other end of the spectrum, women in Afghanistan, Angola and Liberia have an average of 6.8 children. Since the Japanese have one of the highest life expectancies in the world, the country is facing a withering at one end of the life cycle, but a boom at the other. By 2050, there will be more than three times as many people aged 65 or over as there will be those under 14. It is also predicted that there will be 500,000 ­people aged 100 or over.

The obvious solution is immigration. One can read in the Japan Times of the need to “throw the country open to the millions of poor Asians, Africans and Latin Americans who would certainly come if invited”. However, Japan has no history of being a country of immigration; only about 1.5 per cent of workers are foreign. Even in Tokyo, the figure rises to just

3 per cent. The Japanese myth of racial homogeneity is deep-rooted, insular and very protective. The Japanese look at societies, such as the United States and Britain, where immigrants have settled in large numbers, and see fractured ­societies in which an ill-treated caste of foreign labour fill low-paid jobs. For many, it is not an appealing vision of their own future.

According to the UN, if Japan wants to prevent a fall in its working-age population, it will need to take in as many as 650,000 immigrants every year until 2050. This would mean that by mid-century about a third of the population would be of non-Japanese heritage. Is Japan ready for this?

Another option is to encourage women to have more babies. Small bribes are on offer. Child benefit paid to families is modestly pro-natalist. Local encouragement is also available. In the town of Yamatsuri, parents receive $4,600 (£3,264) for the birth of a child, with an additional $460 a year for ten years. It doesn’t sound much – and it ­isn’t. In fact, from whatever source, state cash for parents remains pal­­try. It is more a symbolic sign of goodwill than a serious form of practical

help. The Japanese may worry

about population decline, but

their efforts to reverse the

trend look gestural and

perfunctory.

Predictably, the government has announced a raft of initiatives to get people breeding. The “Angel Plan” and the “New Angel Plan” were both designed to make having children an easier and more attractive option. The latest idea, the “Plus One Proposal”, is directed towards encouraging families to grow by “plus one”. The scheme aims to create parent-friendly working conditions, with funds to be allocated for the construction of 50,000 new day-care facilities.

Yet these initiatives still leave Japan far behind most countries in western Europe in the provision of “pro-parent” state welfare and employment law. And since European countries are also facing population decline, it seems unlikely that the Japanese government’s belated efforts will turn the tide.

There are other options. Two of the more popular are additional automation in the labour market and wider economic participation among old people. Japan leads the world in both. If Japan wants to reverse its declining population, policy levers are at hand. But it seems what the country is going through today cannot be understood simply as a dilemma about which policies to apply. The issue of population decline has brought to the surface long-suppressed questions about the point and purpose of ceaseless growth.

Increasingly the message from Japan is not about how to buck the population trend, but how to adapt to it. One of the country’s national newspapers, Asahi Shimbun, argues that “from the standpoint of quality of life, this is actually a good opportunity to reassess our growth-­oriented post-Second World War values and ask ourselves how we really want to live”.

Urban planners anticipate the end of suburban sprawl, and the emergence of more compact and greener towns and cities. For the demographer Toru Suzuki, of the National Institute of Population and Social Security Research, Japan’s contraction throws up issues that have for too long been avoided in the rush to compete and consume. “It brings you to a very tough question,” he says. “What is happiness? Can we be happy without economic growth?”

This article first appeared in the 09 March 2009 issue of the New Statesman, Planet Overload

MILES COLE
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The new Brexit economics

George Osborne’s austerity plan – now abandoned by the Tories – was the most costly macroeconomic policy mistake since the 1930s.

George Osborne is no longer chancellor, sacked by the post-Brexit Prime Minister, Theresa May. Philip Hammond, the new Chancellor, has yet to announce detailed plans but he has indicated that the real economy rather than the deficit is his priority. The senior Conservatives Sajid Javid and Stephen Crabb have advocated substantial increases in public-sector infrastructure investment, noting how cheap it is for the government to borrow. The argument that Osborne and the Conservatives had been making since 2010 – that the priority for macroeconomic policy had to be to reduce the government’s budget deficit – seems to have been brushed aside.

Is there a good economic reason why Brexit in particular should require abandoning austerity economics? I would argue that the Tory obsession with the budget deficit has had very little to do with economics for the past four or five years. Instead, it has been a political ruse with two intentions: to help win elections and to reduce the size of the state. That Britain’s macroeconomic policy was dictated by politics rather than economics was a precursor for the Brexit vote. However, austerity had already begun to reach its political sell-by date, and Brexit marks its end.

To understand why austerity today is opposed by nearly all economists, and to grasp the partial nature of any Conservative rethink, it is important to know why it began and how it evolved. By 2010 the biggest recession since the Second World War had led to rapid increases in government budget deficits around the world. It is inevitable that deficits (the difference between government spending and tax receipts) increase in a recession, because taxes fall as incomes fall, but government spending rises further because benefit payments increase with rising unemployment. We experienced record deficits in 2010 simply because the recession was unusually severe.

In 2009 governments had raised spending and cut taxes in an effort to moderate the recession. This was done because the macroeconomic stabilisation tool of choice, nominal short-term interest rates, had become impotent once these rates hit their lower bound near zero. Keynes described the same situation in the 1930s as a liquidity trap, but most economists today use a more straightforward description: the problem of the zero lower bound (ZLB). Cutting rates below this lower bound might not stimulate demand because people could avoid them by holding cash. The textbook response to the problem is to use fiscal policy to stimulate the economy, which involves raising spending and cutting taxes. Most studies suggest that the recession would have been even worse without this expansionary fiscal policy in 2009.

Fiscal stimulus changed to fiscal contraction, more popularly known as austerity, in most of the major economies in 2010, but the reasons for this change varied from country to country. George Osborne used three different arguments to justify substantial spending cuts and tax increases before and after the coalition government was formed. The first was that unconventional monetary policy (quantitative easing, or QE) could replace the role of lower interest rates in stimulating the economy. As QE was completely untested, this was wishful thinking: the Bank of England was bound to act cautiously, because it had no idea what impact QE would have. The second was that a fiscal policy contraction would in fact expand the economy because it would inspire consumer and business confidence. This idea, disputed by most economists at the time, has now lost all credibility.

***

The third reason for trying to cut the deficit was that the financial markets would not buy government debt without it. At first, this rationale seemed to be confirmed by events as the eurozone crisis developed, and so it became the main justification for the policy. However, by 2012 it was becoming clear to many economists that the debt crisis in Ireland, Portugal and Spain was peculiar to the eurozone, and in particular to the failure of the European Central Bank (ECB) to act as a lender of last resort, buying government debt when the market failed to.

In September 2012 the ECB changed its policy and the eurozone crisis beyond Greece came to an end. This was the main reason why renewed problems in Greece last year did not lead to any contagion in the markets. Yet it is not something that the ECB will admit, because it places responsibility for the crisis at its door.

By 2012 two other things had also become clear to economists. First, governments outside the eurozone were having no problems selling their debt, as interest rates on this reached record lows. There was an obvious reason why this should be so: with central banks buying large quantities of government debt as a result of QE, there was absolutely no chance that governments would default. Nor have I ever seen any evidence that there was any likelihood of a UK debt funding crisis in 2010, beyond the irrelevant warnings of those “close to the markets”. Second, the austerity policy had done considerable harm. In macroeconomic terms the recovery from recession had been derailed. With the help of analysis from the Office for Budget Responsibility, I calculated that the GDP lost as a result of austerity implied an average cost for each UK household of at least £4,000.

Following these events, the number of academic economists who supported austerity became very small (they had always been a minority). How much of the UK deficit was cyclical or structural was irrelevant: at the ZLB, fiscal policy should stimulate, and the deficit should be dealt with once the recession was over.

Yet you would not know this from the public debate. Osborne continued to insist that deficit reduction be a priority, and his belief seemed to have become hard-wired into nearly all media discussion. So perverse was this for standard macroeconomics that I christened it “mediamacro”: the reduction of macroeconomics to the logic of household finance. Even parts of the Labour Party seemed to be succumbing to a mediamacro view, until the fiscal credibility rule introduced in March by the shadow chancellor, John McDonnell. (This included an explicit knockout from the deficit target if interest rates hit the ZLB, allowing fiscal policy to focus on recovering from recession.)

It is obvious why a focus on the deficit was politically attractive for Osborne. After 2010 the coalition government adopted the mantra that the deficit had been caused by the previous Labour government’s profligacy, even though it was almost entirely a consequence of the recession. The Tories were “clearing up the mess Labour left”, and so austerity could be blamed on their predecessors. Labour foolishly decided not to challenge this myth, and so it became what could be termed a “politicised truth”. It allowed the media to say that Osborne was more competent at running the economy than his predecessors. Much of the public, hearing only mediamacro, agreed.

An obsession with cutting the deficit was attractive to the Tories, as it helped them to appear competent. It also enabled them to achieve their ideological goal of shrinking the state. I have described this elsewhere as “deficit deceit”: using manufactured fear about the deficit to achieve otherwise unpopular reductions in public spending.

The UK recovery from the 2008/2009 recession was the weakest on record. Although employment showed strong growth from 2013, this may have owed much to an unprecedented decline in real wages and stagnant productivity growth. By the main metrics by which economists judge the success of an economy, the period of the coalition government looked very poor. Many economists tried to point this out during the 2015 election but they were largely ignored. When a survey of macroeconomists showed that most thought austerity had been harmful, the broadcast media found letters from business leaders supporting the Conservative position more newsworthy.

***

In my view, mediamacro and its focus on the deficit played an important role in winning the Conservatives the 2015 general election. I believe Osborne thought so, too, and so he ­decided to try to repeat his success. Although the level of government debt was close to being stabilised, he decided to embark on a further period of fiscal consolidation so that he could achieve a budget surplus.

Osborne’s austerity plans after 2015 were different from what happened in 2010 for a number of reasons. First, while 2010 austerity also occurred in the US and the eurozone, 2015 austerity was largely a UK affair. Second, by 2015 the Bank of England had decided that interest rates could go lower than their current level if need be. We are therefore no longer at the ZLB and, in theory, the impact of fiscal consolidation on demand could be offset by reducing interest rates, as long as no adverse shocks hit the economy. The argument against fiscal consolidation was rather that it increased the vulnerability of the economy if a negative shock occurred. As we have seen, Brexit is just this kind of shock.

In this respect, abandoning Osborne’s surplus target makes sense. However, there were many other strong arguments against going for surplus. The strongest of these was the case for additional public-sector investment at a time when interest rates were extremely low. Osborne loved appearing in the media wearing a hard hat and talked the talk on investment, but in reality his fiscal plans involved a steadily decreasing share of public investment in GDP. Labour’s fiscal rules, like those of the coalition government, have targeted the deficit excluding public investment, precisely so that investment could increase when the circumstances were right. In 2015 the circumstances were as right as they can be. The Organisation for Economic Co-operation and Development, the International Monetary Fund and pretty well every economist agreed.

Brexit only reinforces this argument. Yet Brexit will also almost certainly worsen the deficit. This is why the recent acceptance by the Tories that public-sector investment should rise is significant. They may have ­decided that they have got all they could hope to achieve from deficit deceit, and that now is the time to focus on the real needs of the economy, given the short- and medium-term drag on growth caused by Brexit.

It is also worth noting that although the Conservatives have, in effect, disowned Osborne’s 2015 austerity, they still insist their 2010 policy was correct. This partial change of heart is little comfort to those of us who have been arguing against austerity for the past six years. In 2015 the Conservatives persuaded voters that electing Ed Miliband as prime minister and Ed Balls as chancellor was taking a big risk with the economy. What it would have meant, in fact, is that we would already be getting the public investment the Conservatives are now calling for, and we would have avoided both the uncertainty before the EU referendum and Brexit itself.

Many economists before the 2015 election said the same thing, but they made no impact on mediamacro. The number of economists who supported Osborne’s new fiscal charter was vanishingly small but it seemed to matter not one bit. This suggests that if a leading political party wants to ignore mainstream economics and academic economists in favour of simplistic ideas, it can get away with doing so.

As I wrote in March, the failure of debate made me very concerned about the outcome of the EU referendum. Economists were as united as they ever are that Brexit would involve significant economic costs, and the scale of these costs is probably greater than the average loss due to austerity, simply because they are repeated year after year. Yet our warnings were easily deflected with the slogan “Project Fear”, borrowed from the SNP’s nickname for the No campaign in the 2014 Scottish referendum.

It remains unclear whether economists’ warnings were ignored because they were never heard fully or because they were not trusted, but in either case economics as a profession needs to think seriously about what it can do to make itself more relevant. We do not want economics in the UK to change from being called the dismal science to becoming the “I told you so” science.

Some things will not change following the Brexit vote. Mediamacro will go on obsessing about the deficit, and the Conservatives will go on wanting to cut many parts of government expenditure so that they can cut taxes. But the signs are that deficit deceit, creating an imperative that budget deficits must be cut as a pretext for reducing the size of the state, has come to an end in the UK. It will go down in history as probably the most costly macroeconomic policy mistake since the 1930s, causing a great deal of misery to many people’s lives.

Simon Wren-Lewis is a professor of economic policy at the Blavatnik School of Government, University of Oxford. He blogs at: mainlymacro.blogspot.com

 Simon Wren-Lewis is is Professor of Economic Policy in the Blavatnik School of Government at Oxford University, and a fellow of Merton College. He blogs at mainlymacro.

This article first appeared in the 21 July 2016 issue of the New Statesman, The English Revolt