A Reply to Paul Krugman

It is past time Paul Krugman visited “basket case” Japan.

I have been under the weather these last few days, hence my delay in replying to Paul Krugman’s critique of my recent article on Japan’s lost decades.

He writes: “Fingleton is right in this: the data don’t match the picture of relentless decline that is so widely held.” That is putting mildly but it is certainly better than the  “basket case” view  that has for so long been espoused at even the most intelligent levels of American society.

He still needs convincing that Japan has done better than the United States  and provides a chart suggesting that, measured in real GDP per working-age person, the conventional wisdom holds. Fine. But, as he well knows, there are countless hidden and quite controversial assumptions in such a comparison. Given the rise of services as a proportion of GDP, not to mention the conundrums involved in accounting for qualitative improvements in  electronic gadgetry, the inherent measurement problems are far greater these days than in former times when economic output consisted largely of fungible, easily countable items such as tons of coal and bushels of wheat. Moreover even with the best will in the world, the problems are compounded where we are trying to make comparisons between nations so fundamentally different as the United States and Japan. In any case there are differing political agendas:  in the US there is a strong imperative to make the numbers look as good as possible. By contrast the key agencies of Japanese power, the Ministry of Finance and the METI, are  trying to talk the yen down and keep Western trade negotiators at bay. The lower Japan’s economic profile, the better, from their point of view.

For me by far the most problematic statement in Krugman’s commentary is this: “Current account surpluses aren’t necessarily a sign of success.” An ivory tower economist can, I suppose, imagine circumstances in which rising surpluses might be considered a sign of weakness and deficits a sign of strength — but such circumstances are  temporary blips and  don’t apply to a Japanese trade policy that, except for a break in the early 1940s, has been consistently pursued for 140 years now. Krugman seems to forget that the soubriquet “Juggernaut Japan”  was coined in the 1980s precisely because  Japan was so successful in boosting its trade surpluses.  (Reality note: Unlike some other commentators,  Krugman to his credit does not cite last year’s decline in Japan’s surplus as evidence of a fundamental change. There are several things going on in the decline, of which the earthquake, the tsunami, the nuclear meltdown, the power shutdowns, and the Thai floods are only the most obvious. A key reason why Japan’s merchandise trade is lower than formerly is because of massive transfer pricing — a point that The Economist missed in a recent analysis.)

In incurring deficits, the United States has been going ever deeper into debt to other nations. In earning surpluses, Japan by contrast has been acquiring ever larger assets abroad, not least in the United States. This is ultimately a matter of national security: debtor nations increasingly must defer to creditor nations. Even if this is not fully appreciated in the West, it has been central to Japanese policy thinking since at least as far back as the 1870s. It was also well understood by President John Kennedy, who said the two things he feared most were nuclear war and trade deficits.

The striking contrast in trade performance — with Japan increasing its current account surplus more than threefold while the United States increased its current account deficit nearly five-fold in the two decades — is a development of literally pivotal historic significance.

Evidently overlooked by Krugman, the world has experienced the fastest and most astounding  industrial revolution in  history in the last two decades. The world total of cellphone subscriptions alone has rocketed from 12 million in 1990  to 4.6 billion in 2010. And Japan — a nation whose economy turns much of U.S. free-market ideology on its head — has led virtually every aspect of the revolution. That is because it dominates the upper reaches of the world supply in most of the producers’ goods involved, not least the key components in cellphones.

Japan’s manufacturing leadership is obvious in the fact that its exports to China alone run more than $120 billion a year. Much of what the Chinese import is available nowhere else. The Japanese have deliberately targeted ever tougher manufacturing challenges, thereby pioneering the production of a succession of ever more miniaturized components that are far beyond the unaided competence of the Germans, let alone the Koreans and Taiwanese (and, of course, of the Americans and the British, who started dropping out of capital-intensive, know-how-intensive manufacturing a generation ago). Of course the pattern is for the Koreans and Taiwanese to follow in  Japan’s footsteps  after a lag of about 10 years but they do so with machines and manufacturing technologies acquired from Japan. It is a win-win for all involved.

In “crown jewels” technologies moreover, the Japanese have actually strengthened their grip over the years. Take, for instance, something as seemingly mundane as silicon for silicon chips. Each new generation of computer chip requires an ever more refined version. It is a challenge that has required ever more rarefied production technologies. The last remaining American producer was Monsanto, which dropped out decades ago. Even Germany’s Wacker Chemie, the only European supplier, no longer can make the real thing and contents itself with making a semi-purified form known as “poly.” These days two Japanese companies, ShinEtsu and Sumco, make virtually all the world’s supplies of semiconductor grade silicon crystal. One tiny American company is still technically in the business but its key factory is in Japan and its entire operation is a figleaf for Pentagon contracting purposes. (It is worth pointing out that several American companies make silicon wafers but that is a separate, less sophisticated activity that depends on crystal sourced from Japan.)

Paul Krugman has already extensively and skillfully debunked the ideologues in U.S. domestic economic policy and rightly enjoys enormous political influence. If he were to use this influence to explain to Americans what globalism really means, he might change history. A journey of a thousand leagues begins with the first step. It is time Paul Krugman visited us in Japan and saw for himself  what this “basket case” economy really looks like.

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