The Economy, in Japan, and Elsewhere

Clifford F. Thies

Clifford F. Thies is a professor of economics and finance at Shenandoah University, and a resident of Winchester, Virginia.

Is the sluggishness in Japan due to bad loans? Close. Bad loans happen. The question is, once bad loans happen, what is done? Generally, the more objective, quick, and efficient (that is, “ruthless”) bankruptcy courts are in resolving bankruptcies, the better for everybody.

In our country, we have lots of bankruptcies: A million or more per year of personal bankruptcies, and thousands of business bankruptcies, including a stream of bankruptcies of very large corporations.

While I think we need to tweak the bankruptcy law, thinking it has became too lenient on debtors in certain places, and too tough in certain places, basically, in our country, bankruptcy is usually pretty straightforward.

The problem of forbearance is that it continues a situation involving perverse economic incentives. Access to capital is great for development. Not everybody with talent and ambition got born into families that could afford to have Daddy Mac finance them. But, debt can be also a trap.

We can presume that creditors extend loans in line with debtors’ ability to pay, both in terms of “the numbers,” and in terms of incentives. That is, if all goes according to expectation, the debtor repays the loan because to do so is clearly in his or her self-interest. Repayment is not a burden.

For example, if a couple goes into debt to buy a home in line with their earnings potential, and then actually make the payments, they are able to enjoy their earning power while they are still young. But, if their income falls short of expectation, they need to be foreclosed upon, and move to another home in line with their lower earnings (as actually realized).

Not foreclosing risks not only losses to the creditor, but short-shifting maintenance, and development of hard feelings, which can poison the relationships not only between a particular debtor and creditor, but between people who belong to the debtor class and those who belong to the creditor class. (The way it’s supposed to work is that individuals pass, rather fluidly, from one to the other class as they age.)

Similarly in business, not foreclosing entrenches management, squanders corporate resources in legal disputes, and encourages management to take imprudent risks. For example, I hope United Airlines will emerge out of bankruptcy able to operate in the black. My fear is that they will disappear while in bankruptcy court, the way Eastern Airlines did a generation ago.

Bankruptcy, after all, is or should be merely a reshuffling of financial claims, from what is discovered to be untenable, to what is not only realistic, but avoids conflict of interest among those involved and induces performance by the decision makers involved.

Now, to speak directly about Japan, the country has taken giant, bounding steps to “democratize” itself, and to open its economic information internationally over the past 60 years. But, a residue of opaqueness remains, along with certain protected classes.

They need to pursue the financial reforms they have laid out for themselves, rather than pursue the Keynesian program of deficit spending on public works. (Would Senator Bobby Byrd fit in, in the Diet of Japan!) I think the people of Japan expect a lot from their new (and young!) Prime Minister, Mr. Koizumi.

I agree with Paul Johnson, that we should figure out how Great Britain, Ireland (which is also a dynamic country, although on the euro), Australia and New Zealand could all become states of the United States.

I also think well of Spain (maybe it’s only because while France and Germany have been unhelpful in the Persian Gulf situation, Spain has thrown its lot in with ours). The partial reconciliation of Protestantism and Catholicism opens up possibilities that have not been possible since the blood feuds of the English and Spanish monarchies of 600 hundred years ago.

I don’t know which way France and Germany will go (nor Russia). The Gaulist coalition had an overwhelming victory in the most recent French elections, but for what purpose? They’re all socialists! (Except for the Communists.) The conservatives in that country used to define themselves with reference to a unique, “national” economic program. What does this mean in an age characterized by an integrated trans-European economy (which may or may not be part of an emerging global economy)? I suspect they think it means imposing the French economy on the rest of Europe.

There’s one little problem in France’s latest scheme to turn the continent of Europe into Greater France. They haven’t yet figured out how to carve Germany out of central Europe and tow it to the western hemisphere or some other place. The Germans have their own problems with the welfare state and assimilating a generation of eastern Germans who were raised under Communist rule. But eventually the hard-working, mundane middle-class of Germany is going to dominant the economy of central Europe, not the intellectuals of France.

This is why Great Britain should remain a bit on the sideline. Not even I can figure out which way the European Union will go, whether-like the United States-it will meander toward ever greater freedom and equality under law, along with a bustling economy and culture, or succumb to socialism, entrenchment of the powerful, corruption and economic decline.

The Keynesian idea that we should encourage consumer spending to keep up the U.S. economy is bogus. There are times (at least in theory) when consumers should cut back, even though this will cause some dislocations in the economy. (The worst dislocation last year was the severe hit taken by the travel and leisure industry.)

But, the economy is doing fine. The figures are a bit ragged, but it looks like we’re growing at a healthy and sustainable pace, and have been since late last year.

Why the gloom? First, the index of lagging indicators includes measures of disappointment and distress. Things like burdensome debt, inventory over-hangs, and long-term unemployment. This is part of the messy cleanup we have to deal with after every recession. I have seen this before, in my past lives as well as in this one, time and time and time again.

It’s like the implosion of Three Rivers Stadium. Everybody wants to see the massive structure come down. And, nowadays, with the wonderful internet, we can all see the video clip. In my mind, I see Godzilla walking through the stadium, arching his back, and spitting out an electric arc to implode the stadium. But, after those six seconds are over, there’s weeks of work to haul out the rubble. Well, that’s what’s happening out there in the economy right now. The index of leading indicators went up last year, signally recovery. And, for the past year or so, and continuing for a while, a lot of people out there are doing the work necessary for turning the economy around.

Maybe the day will come when almost all our people are quite happy with their standard of living, as measured by the GDP, and choose to spend more time in leisure, pursuing beauty, culture, the outdoors, and so forth. Sounds pretty good to me, actually. I really don’t care whether the GDP is trending up or not, as long as whatever it is doing, in the long run, reflects the free choices being made by people. (Of course, the government would always like a bigger GDP, because that’s what they tax.)