Rebuilding after the terrible tragedy in Japan
ASK THIS | March 13, 2011

It may be early for most people to turn to the enormous problems of putting Japan back together but somebody's got to think about it. Here David Cay Johnston gets into the questions reporters should ask, along with basic facts, economic concepts, and financial ramifications, including those for America.

By David Cay Johnston
johnstonstake@tax.org

The awful human tragedy that is northern Japan following the earthquake and tsunami is also an opportunity to question the assumptions built into many American news reports about our own country. Reporters who ask the right questions and dig will find that the assumptions permeating what Washington politicians say range from faulty economics to utter nonsense.

Here are some questions to ask and some facts and basic economic concepts to help journalists get to real answers, not canned talking point responses:

1. How will Japan finance rebuilding?

By borrowing the money.

Japan's ten-year notes currently pay 1.27% interest, down from an average rate of 1.39% over the last decade, according to Bloomberg Business News. Just as in America, as government debt grew, interest rates went down. Japanese economic rules channel vast amounts of savings into government debt, so much that the pressure on interest rates was downward even as debt grew because the economy was not growing and more yen were piling up than could be put to work profitably.

Japan has twice the debt of the United States relative to the size of its economy. In 2001 Japan's debt was 135% of its annual gross domestic product or GDP. Now it is almost 200%.

At the start of 2001 the U.S. government's debt was about $5.7 trillion or 55% of GDP, while at the start of 2011 it was about $13.6 trillion or about 92% of GDP. The federal government's average borrowing rate has fallen by a bit more than half since 2000.

2. Why would interest rates fall as debt grows? Why aren't interest rates rising?

Interest represents the rental of money. Think of renting a home or apartment from a landlord. Same thing. Expense to one side, income to the other. When there are more vacant housing units than would-be renters then rents fall. When there is more cash than borrowers (or equity investors) can put to work interest rates fall.

As Adam Smith, the father of market economics, taught more than two centuries ago, confusing money and wealth is a common fallacy.

America, like Japan, is awash with money with no profitable place to invest because people do not have enough income to acquire more goods and services, known as aggregate demand. Money plentiful, wealth not growing so much equals falling interest rates. When the interest rate is lower than the rate of inflation cash loses value. In effect, lettuce at the bank rots, just like lettuce in the refrigerator.

Interest rates tell you about the future. Low interest rates mean there is little economic growth so a dollar today will be worth close to what a dollar will be worth a year from now. If we had robust economic growth interest rates would rise.

If Japan needs to raise more money it can raise interest rates. Doubling rates would bring them to 2.54%, a very low rate by any standard in the last century.

3. Who will loan money to the Japanese government, given its debt?

The Japanese people and corporations first and, if needed, the rest of the world.

Borrowing from its own people, who are prodigious savers (unlike Americans), will be easy. Japanese economic rules funnel lots of savings into a government-debt system with limited alternatives. To attract new sums the government could just pay a bit more interest, which would also help deal with other problems caused by low interest rates, which are also prevalent in America, including low incomes to those people living off their savings.

4. How will Japan pay for this debt?

First, rebuilding northern Japan will produce an economic boom. The Japanese build some of the best earthmoving gear and their civic, civil, mechanical and other infrastructure engineers are tops.

Rebuilding means jobs, salaries and profits. That also means more tax revenues. (Falling incomes, reduced government spending and using up commonwealth goods like roads and bridges rather than maintaining them depresses economic growth. In time they hobble growth: the costs of moving goods rise when roadways develop potholes, cannot carry as heavy loads and, in the case of bridges, ultimately collapse.)
    
For context, reporters would do well to read about the economic effects of rebuilding San Francisco after the 1906 earthquake and fire. (And be wary of corruption and inefficiency. Politicians in San Francisco had cisterns built but then did not put water in them and pocketed the money, not unlike today when we let water mains, and dams and bridges, fall into disrepair.)

Second, Japan will service new debt by raising taxes. Consider this breathless lede from Dow Jones, a Rupert Murdoch agency, a month before the great quake:

TOKYO (Dow Jones)--Japan's outstanding public debt hit a record Y919.151 trillion at the end of last year, the Finance Ministry said Thursday, likely fueling concerns over the nation's fiscal health and adding to a sense of urgency within the government to quickly formulate a tax hike plan.

Can you imagine any dispatch from Murdoch's Wall Street Journal or Fox News declaring without attribution or ridicule "adding to a sense of urgency within the government to quickly formulate a tax hike plan"?

Japanese Prime Minister Naoto Kan's administration has been talking about raising taxes, and significantly, for more than a year. Indeed, when he was finance minister he spoke about it, but in terms much of the press misunderstood. "I had a strong feeling that we should never let Japan fall into a situation like the one suffered by Greece,’‘ Kan said last July, shortly after becoming prime minister, which brings us to the next point.   
    
4. Is Japan like Greece? Is it burdened with debts and no ability to repay them without crushing increases in taxes and debilitating withdrawals of the commonwealth services on which economies depend?

No, Japan is not at all like Greece, which leads to two crucial facts very few write about. One is that Japan has a pretty good tax system in that cheating is not the norm, while cheating is the standard in Greece, especially by the affluent and rich. In America the Republican leadership and the new Tea Party members of Congress want to cut the IRS budget by 5%, a gift to tax cheats, especially the most sophisticated cheats.

Greece could solve its debt problem with less pain if it had its own currency. But because it is on the euro, instead of the drachma, it cannot adjust the price of its currency to work its way out of debt.

Japan does not have a currency problem in borrowing because almost all of it's borrowing is from its own people and is denominated in the national currency, the yen.

Here is the other crucial point: No sovereign with monopoly control of its currency can go broke in that currency. (To those thinking of emailing me about the now worthless Soviet ruble, the Confederate dollar, etc., those were issued by sovereigns that no longer exist and, thus, no longer have a monopoly on their own currency. The risk of revolution in Japan, which could make its currency and its debt worthless, is as close to zero as it gets. In America that risk is small, but somewhat higher as shown by elected officials talking about assassinating the president and domestic attacks on the government in Oklahoma City, Austin, and elsewhere, and the small but increased number of organizations that declare the American government illegal and even criminal.)

5. What will rebuilding Japan mean for America's economy?

More jobs.

One effect will be reduced output, temporarily, of Japanese vehicles for export to the United States, while Japan will likely increase imports of American-made goods, especially any the Japanese cannot temporarily make enough of to rebuild cities, infrastructure, factories, etc. This should, at least for a spell, reduce the roughly $50 billion annual negative spread between what we export to Japan ($117.5 billion in 2009) and what we import ($167.4 billion).

(Side fact: Japanese cars assembled in the America and Canada do more for Japan's economy than ours because the value-added work, notably making the highly-engineered and quality manufactured parts like those in the engine and transmission are done in Japan, while the low-value work of fitting the pieces together in an assembly plant is performed in America and Canada.)


 David Cay Johnston, a Pulitzer prize winner, is a columnist for Tax Analysts and teaches the law of the ancient world at Syracuse University’s law and graduate business schools. The Fine Print, the third book in his series about the American economy, is scheduled to be published in 2011 by Penguin.
E-mail: johnstonstake@tax.org

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David Cay Johnston had an interesting childhood introduction to inequality in this world; here are some quotes from interviews he has given:

Venue for an Artist - Dorothy Smith [www.thedish@thedish.org ]

Interviews with David Cay Johnston (Excerpts)

According to David Cay Johnston, 2001 Pulitzer Prize winning author of the best-seller Perfectly Legal: the Covert Campaign to Rig Our Tax System to Benefit the Super Rich--and Cheat Everybody Else, "The poor losing ground to the rich is not just about the tax deal that was passed last December which basically redistributed wealth to the richest Americans but the new proposed budget cuts takes more money out of programs that help the poor and the middle class." Johnston's latest book, Free Lunch: How the Wealthiest Americans Enrich Themselves at Government Expense and Stick You with the Bill, explores the power of lobbyists and wealthy donors to manipulate government policies such as regulation, taxes, and subsidies to enrich themselves at tax-payers' expense. During Interviews Johnston explains his view of the world, how the government aids corporations and the super- rich in using the tax system like a "cash cow," and why the middle class is drowning in a system awash in money.

"To begin with, as a result of my father, who grew up in New Orleans and left there because he couldn't stand the racism, I was always interested in the exercise of power. He would stand my brother and I in front of the little 15-minute news in the '50s and we would see hoses being turned on demonstrators or whatever and he would say, you know, "There but for the grace of God - go you, you know? You could be black and living in the South and your life would be horrible." And that got me to seeing around me-- things about how people are treated. And then when I became a reporter, I began to realize that you can have a nice life and just report on what the city council said but that there were really interesting things going on if you paid less attention to what the politicians said and more attention to what the government actually did. And it got me to start thinking about how government finance and taxes and government spending are related to the quality of our lives.

I will be the first to admit, there are lots of problems with the government. I've spent my life exposing all sorts of problems with government. But government is fundamentally essential. Government is what creates for us civilization. We created this country so that we could be free and pursue our lives the way that we want to pursue them. And wealth is a byproduct of that. But the government is being turned into a vehicle not to ensure our liberties and create a level playing field but instead into a vehicle to take from the many to enrich the few.

My life has worked out much better than I imagined when I was a teenager. Growing up in Santa Cruz, in a leaking old wreck of a house on a cliff over the beach that my na'er do well parents somehow rented for a song, I was eager to get to better economic circumstances; not to be rich, but to prosper enough to own my own home and raise a family without worrying much about money. The President says "a rising tide lifts all boats," that is, unless you're in the dinghy tied to the dock, and then you get swamped. Poor Americans, which is not like being poor in the Third World, but they are the worse off. Most Americans have seen their incomes stagnate or decline slightly. People have fewer fringe benefits. They have less in retirement. They have an enormous amount of debt. I bought my first home when I was 22 and fortunately still have it. However, for every additional dollar since 1980 people have gotten in equity in their homes, they've taken on $2 of debt. That's not a prescription for becoming well off.

This is not investing in the future. One of the great blessing in my life (and my wife's) is that neither of us has ever done anything we considered the least bit unethical because of pressures from bosses or anyone else. President Obama is not a particularly liberal president, despite all this talk about his being a socialist. Anyone who has read his life story, read whom he promoted to the high positions at the Harvard Law Review, when he became editor, will see this pattern of being very closely identifying with Wall Street, wealthy people, and their interests. Look who surrounds him in the White House? They’re people from Wall Street. So it’s been a consistent pattern of the President’s, and he has bought into a budget now in which he’s suggesting we’re going to reduce support for college students and graduate students. The people who are going to have the high incomes and intellect to develop the future economy, my goodness, would you expect that of Obama?

I’m asking in Free Lunch: Are you better off than you were a generation ago when Reagan was elected? Government is just as big, there are vastly more regulations, and as I show, we have many new rules and regulations that handcuff the invisible hand of the market and instead, in subtle, sometimes hidden, ways, extract money from the pockets of the many and funnel it to the politically connected few. It’s the very thing that Adam Smith said would ruin the benefits of markets

Even though Republicans pledged not to raise taxes at all and President Obama promised he would not raise taxes on those making less than $50,000 a year, it turns out that poor and middle class incomes are not only getting taxed more their incomes are being cut in the new budget. The tax deal killed what is called the making work pay credit, which helped lower taxes on lower income Americans. This resulted in increased taxes for a lot of poor people rather than a tax cut like the richest Americans received. Think about it, 50 million people in America are among the bottom third of workers making less than $15,000 a year and will see their tax bill rise by 4% of their income. Their average income is only $6,000, they get hit particularly hard.

At least 2/3 of the people making less than $18,000 a year will pay more in taxes. So as a percentage of their income, the poor are getting hit the hardest; 40% of the people making less than $35,000 will pay more; 20% of the people making less than $64,000 will pay more; 12% of the people making less than $104,000 will pay more; but the worse thing is of the people making more than $564,000 a year, less than 2% will see their taxes go up, thanks to the so-called bipartisan tax deal. Moreover, 98% of the super-rich get huge tax cuts, and two thirds of the poor get tax increases. And, all of this was agreed to by a progressive Democratic President. "Would things have been worst under a Republican? (Sources: http://reason.com/archives/2007/12/28/the-cost-of-a-free-lunch/1, www.pbs.org, and www.vowels-patternsandsounds.com)