An Abenomics lesson on politics for Uncle Sam

October 2, 2013

By Rob Cox
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Two years ago, there was no gloomier place than Japan. The country was recovering from the horrific devastation of the Fukushima earthquake and tsunami. Fearful of radiation poisoning, Tokyoites were purchasing Geiger counters and eschewing vegetables. The government was a thicket of finger-pointing, evasion and paralysis.

Things couldn’t be more different today. Just this week, Prime Minister Shinzo Abe forged ahead with the kind of measure that in any normal democracy would provoke howls of protest: a 60 percent hike in consumption taxes.

Now, contrast Tokyo’s politics with those of the country that effectively drafted the Japanese constitution: The United States. An impasse over whether to pay the nation’s bills – between Republicans and Democrats, the House and the Senate – has plunged the nation into such dysfunction the government has shut down, sending 800,000 federal workers home and forcing parks like the Statue of Liberty to padlock their gates.

What’s most startling about the contrast between two of the world’s largest democracies is that Japan was the paralyzed one just two summers ago. It was the country considered hopeless on just about every front with a sclerotic political system incapable of making even the simplest of decisions. The lesson for Uncle Sam, and many other developed Western nations, is a pretty simple one: Staring down the barrel of a demographic shotgun concentrates the political mind.

Even in Japan, there is no consensus on whether Abe’s economic experiments will sustain the country’s economic revival. But just about everyone in the Japanese political, corporate and financial establishment is sure the country has only one last shot at making that happen. “We have no choice,” said Abe on Tuesday when unveiling the package, which included a 5 trillion yen ($51 billion) package of public works spending and other stimulus.

The reason is pretty obvious. Japan is shrinking as a nation. Barring any unlikely cultural shift in favor of immigration, over the next twenty years or so the country will experience a net population decline of around 1 million persons annually. As a consequence, a key demographic measure known as the support ratio – the number of working-age people for every person over 65 – will continue to drop from its current very low rate of 2.5, according to the U.S. Central Intelligence Agency. By comparison, the relatively younger and more immigrant-friendly United States has a support ratio nearly twice as high.

In Japan’s case, that is exceptionally worrying given the country’s debt burden, which is already the highest in the developed world at more than 200 percent of gross domestic product. In that sense, Abe’s policies are an attempt to solve a complicated mathematics exercise. It must reduce the numerator in the equation, the debt, while simultaneously expanding the denominator, the country’s output. That explains this week’s seemingly schizophrenic package of both spending and cutting.

The risk for the Abe government of the plan cannot be underestimated. A similar increase in consumption taxes in 1997 is widely blamed for kicking off a decade-long economic downturn. Consequently, this is a third-rail political issue in Japan. On the flip side, for fiscal conservatives, so is spending another 5 trillion yen on public works, including stadiums and other facilities needed for the 2020 Tokyo Olympics.

All of this further highlights the extraordinary contrast with America’s current political situation. House Republicans have been unyielding in their quixotic quest to link the payment of Uncle Sam’s bills with President Barack Obama’s signature piece of legislation, the Affordable Care Act. Should the stalemate continue for another few weeks, as the last shutdown did 17 years ago, America risks a default on its debt.

Against this, what’s happening in Japan is encouraging. It suggests that even the most paralyzed democracies, when galvanized by a unifying force – in Japan’s case demographics – can turn on a dime. Two years ago in Japan, all hope seemed lost, Tokyo was irradiated. The nation was resigned to shrinking influence and dimensions. The startling turnabout of the Japanese mood, combined with the government’s political will to follow through on policies of shared sacrifice, offers hope – even to the United States.

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