Friday, January 2, 2015

Why Isn’t Japan In the Toilet? Because Most People Writing About Macroeconomics Can’t See the Forest for the Trees

I’m not going to claim that Japan is in great macroeconomic shape. In per capita terms, the country may not have peaked around 1990, but there certainly was a big kink in growth rates that occurred at that time. And Japan has been struggling with weak aggregate growth every since.

But, this is not the story you’ll here in the legacy media where comparisons of (national) debt to GDP are accepted without question. To these folks, Japan has the highest debt/GDP ratio of any developed country, and is headed for a crash. Here’s a common view:

To illustrate just how woeful Japan’s fiscal conditions are now, one merely has to look at how they were in March 1945. About half a year before Japan’s military-controlled government surrendered, Tokyo was borrowing at a feverish pitch to pay for its losing war effort and the Bank of Japan was furiously printing money to cover the soaring deficit.

The central government’s debt-to-gross domestic product ratio stood at 204% at the end of March 1945.

More than half a century later, this ratio–a key measure of a government’s ability to pay down debt–is already above that milestone. The Ministry of Finance estimates it will reach 227% by the end of March next year.

That’s from The Wall Street Journal, which is supposed to know better.*

Do note, before I go on, that this is the same argument by people who worry that the U.S. is in trouble because our national debt is about 100% of our GDP (both are around $17T, give or take).‡

The thing is, this is mostly nonsense. Innumeracy at a basic level is being demonstrated here. Specifically, you can always compare a stock variable to another stock variable, you can always compare a flow variable to another flow variable, but when you compare stocks to flows you get a rate, and you need to be very careful that your interpretation of that rate isn’t nonsense.

In this case, debt is a stock variable defined in yen. GDP is a flow variable measured in yen per year. Do the math: the correct figure is not 227% but 2.27 years. Reciting that it’s 227% is a scare tactic. Stating that it’s 2.27 years sounds like nonsense because it is. This measure that they’re crowing about means that if Japan devoted all of its national production to paying off national debt, it would take 2.27 years. Except that’s silly because all the residents of Japan would starve.

Appropriate alternative comparisons, which can still show that Japan is in bad shape but which rest on a foundation of numeracy, include comparisons of national debt to national wealth (both stocks) or GDP to interest payments on the national debt (both flows).

The amazing thing is that this article actually includes the former, but, it’s down at the bottom (where no ever reads), and it’s really small (because it doesn’t tell a story that the sky if falling that will sell newspapers):

If there’s one asterisk to put after the shocking comparative figures, it’s that the debt-to-GDP ratios don’t take into account Japan’s huge asset holdings. At the end of March 2012, Japan’s central government had assets totaling some Y600 trillion, roughly half of its total liabilities projected for next March, separate MOF data show. And those assets include Y250 trillion in cash, securities and loans. Critics often say Japan’s fiscal health could quickly improve if the government sells some of those assets …

Folks, they’ve just put an asterisk on the only part of the article that’s actually coherent. Pity.

* Economists know that the reporters for The Wall Street Journal are not particularly conservative/libertarian, and can’t be expected to be an improvement over most other legacy media outlets. It’s the editorial page that sets The Wall Street Journal apart, and which upsets so many progressives.

‡ If you are worried about the national debt, please worry about the present value of unfunded future obligations, which is about 13 times larger. The problem with (announced) debt is how you make the payments to your debtholders. This means that unfunded obligations are the exact same problem, just with a different name.

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