Learning about economics from Akira Kurosawa
Adam Posen gives this superb must read lecture on lessons from Japanese crisis and its implications for world economy and UK in particular. A short summary is here
He draws analogies from the movies of great Japanese moviemaker Akira Kurosawa.
His speech is based on three Kurosawa classics:
Not Ran: Japan’s economic fate was not sealed by the bubble –
Not Rashomon: Japan’s policy measures had mostly textbook effects
Perhaps Seven Samurai: A concluding note for policymakers
In brief he says:
Japan’s Great Recession was the result of a series of macroeconomic and financial policy mistakes. It was largely avoidable once the initial shock from the bubble bursting had passed. This is demonstrated by the under-appreciated strength of Japan’s recovery once policies were reversed in 2002-03.
Japan actually had a number of structural advantages that made its stagnation all the more avoidable, particularly with respect to fiscal policy. Structural deficiencies in Japan’s financial system and in its corporate governance offset these when the deflation persisted.
The aberration in Japan’s recession was not the behaviour of growth, which is best seen as a series of recoveries aborted by policy errors – a sawtooth, not a flat line. Rather, the surprise was the persistent steadiness of limited deflation, even after recovery took place. That is a more fundamental challenge to basic macroeconomic understanding than is commonly recognised, and more research is needed.
The UK and US economies are at low risk of turning Japanese in the sense of having recurrent recessions through macroeconomic policy mistakes – but deflation itself cannot be ruled out. The UK worryingly combines a couple of financial parallels to Japan with far less room for fiscal action to compensate for them than Japan had. More active investors and greater openness in the UK than in Japan may be able to turn this around.
One major problem which Japan did not face during its Great Recession was poor prospects for external demand and the need to reallocate productive resources across export sectors. The UK, US, and many Euro Area economies do now face this challenge simultaneously, which may limit the pace of, and our share in, the global recovery.
He adds that there is plenty of confusion over whether fiscal policies work or not. They work provided they are tried properly.
As always, Posen gives you more information that one can digest. Amazing stuff with tons of references. A must read.