Structural Reform Not Just for Labor

Reading the Times the other day I found probably the most explicit example I’ve ever seen of the old cannibalizing the young through deflation and a strong currency:

Increasingly, however, business leaders point to a problem that is at least partly within the government’s power to control: a high yen that has made Japanese products, from televisions to memory chips, prohibitively expensive abroad. In an echo of a debate that raged in the United States in the 1980s, the government faces growing criticism for doing almost nothing to rein in the yen, despite alarm that the record-high currency is dealing crippling blows to the country’s once all-important export machine.

One big reason, analysts and some politicians say, is simple, if generally left unsaid: A high yen benefits Japan’s rapidly expanding elderly population, even if it hurts other parts of the country.

By speeding the flood of cheaper imported products into Japan, the strong yen is contributing to deflation, a broader drop in the prices of goods and services that has helped retirees stretch their pensions and savings. The resulting inaction on the yen, according to a growing number of economists and politicians, reflects a new political reality, with already indecisive leaders loath to upset retirees from the baby boom who make up more than a quarter of the population and tend to vote in high numbers.

“Japan’s tolerance of the strong yen and deflation is rooted in a clash of generations,” said Yutaka Harada, a professor of political science and economics at Waseda University in Tokyo. “And for now, the seniors are winning.”

This is, of course, strangling the broader economy:

That victory comes at a high price, however, hastening the hollowing out of Japan’s industrial base as companies continue to move abroad, exacerbating the nation’s two-decade-long economic stagnation.

This got me thinking of the concept of “structural reform.” This is usually economist code for the classic Republican agenda: removing worker protections, sticking it to unions, cutting public sector salaries, and so forth, with the goal of making the economy look more like a neoclassical economic model. (I actually think occasionally that is a reasonable prescription—not for many industrialized countries I’m familiar with, but for the likes of South Africa, where the public employees really do make too much and there is a corrupt alliance between unions and the government.)

But if we think about the interpretation a phrase like “structural reform” is designed to inspire, this kind of behavior on the part of Japan’s elderly looks perfect. Consider this find in the piece:

“The strong yen robs from youth, but there is not much awareness here yet of generational inequalities,” said Keiichiro Asao of the opposition Your Party. One way to spur such awareness, critics say, would be to allow national pension payments to drop with falling consumer prices, as the law demands. But the government ignored the law for years rather than upset elderly voters.

Emphasis mine. So the law said that if prices fall, then pensions fall with it. The Japanese government, afraid of an elderly backlash, simply broke the law and allowed the old to make off with an even larger piece of a shrinking pie. For getting out of this situation, I’m partial to Steve Waldman’s idea of starter savings accounts. The idea is to buy off the elderly creditor class with size-limited inflation-protected accounts which would dampen their fear of price increases. For the Japanese situation, we could add some more subsidies for a change in the exchange rate. It would be tough to pull off, and vulnerable to financial parasitism, but it would make the costs of supporting the elderly explicit and contained, rather than operating through obscure economic levers that strangle output.

The other obvious candidate for reform would be central banks. As Dean Baker is continually reminding people, banks from around the country get to appoint a large fraction of Federal Reserve positions, including several of the voting members of the Federal Open Market Committee. This reform is conceptually easy, though politically impossible: just make the Fed a government agency like any other. Obviously that won’t get rid of revolving-door syndrome, but simply getting working bankers out of influential positions is a huge step in the right direction. Whoever is in charge when the next financial crisis strikes should jam this one through at all speed.

Anyway, this is just to point out that right now it’s the rich, the powerful, and the elderly that are inhibiting the full potential of the economy.

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Ryan Cooper

Ryan Cooper, a contributing editor of the Washington Monthly, is currently the Washington correspondent for The Week.