The magic of Abenomics
Japanese Prime Minister Shinzo Abe just crushed his opponents after calling a snap election of Japan's Diet, the lower house of Parliament, of which Abe's coalition will now control a supermajority. Coverage of the election is likely to focus on foreign policy: Abe called the election in part because he wants a mandate to change the country's constitution to remove its postwar "pacifism clause" in the face of rising threats from North Korea and China.
But Abe's enduring political success also speaks to the bizarrely ignored success of Abe's economic agenda, called Abenomics.
Japan is a generation ahead of most of the major economic problems facing the rest of the rich world. We're all aging rapidly, but Japan is well ahead of us. Since the financial crisis, many Western economies have been wondering what to do with central bank interest rates stubbornly stuck at or near zero; Japan has been there since the early 1990s. So what Japan gets wrong — or right — can help us face our own economic future.
When Abenomics was getting started and results were inconclusive, Western economic pundits couldn't stop bashing it. Now that it's pretty much a smashing success, those same people are bizarrely silent.
Despite a blip in 2014, Japan has enjoyed strong growth under Abe. Since 2015, it's had its best run in over a decade, and unemployment is down to an incredible 2.8 percent. Wages are rising, and so is the stock market. After years of tut-tutting, even the IMF has thrown in the towel and called Abenomics a success.
So ... what's the magic recipe? What is Abenomics?
The short answer is that Abenomics is everything.
There are basically three schools of thought when it comes to juicing an economy. One, typically associated with the left, recommends fiscal stimulus, through increased government spending or targeted tax cuts. The other two, which are more right-wing, focus on either "supply-side reforms" (jargon for cutting regulations on business) or monetary stimulus, which means the central bank prints ever more money until the economy improves.
How do you pick between those three? Abenomics is what happens when a country's leader gets so frustrated that he says, "Screw it, let's do everything."
And guess what? Doing everything worked! Up until Abe, Japan had tried a little bit of each, but in fits and starts, without overall vision. After nearly three decades of stagnant growth and the looming challenge of an ever-shrinking workforce, Japan's policy world was finally ready for drastic measures. Abe basically took all the dials of economic policy and turned them up to 11.
Is it really that easy? Yes, actually, it is. What gets in the way is ideology. In the United States, former President Barack Obama tried to embrace fiscal stimulus, but was blocked from going further by a Republican Congress, even as he didn't want to enact significant tax cuts. The Federal Reserve did as much as it could to prime the pump so that things wouldn't get worse, but the political pushback was so severe that Fed Chair Ben Bernanke didn't dare go much further. In Europe, things went much worse. Germany vetoed the kind of monetary stimulus that could have eased the euro crisis, even as it imposed drastic spending cuts on underperforming Southern European economies, kneecapping their economies.
But if done correctly, these forms of stimulus actually work together. Deregulation is painful in the short term, but fiscal stimulus provides short-term pain relief until the long-term benefits kick in. Monetary stimulus accelerates those gains and helps them translate into wage growth, not just lower unemployment. Because fiscal and supply-side reform create new economic activity, the new money created by the central bank goes into new, productive economic ventures instead of into destructive inflation. You need all of them together, simultaneously, to get the effect.
So why don't we implement Abenomics in the West? Because we'd have to slaughter too many ideological sacred cows. The left hates supply-side reform, and the right hates fiscal stimulus. Left and right both hate monetary stimulus, the left because it suggests fiscal stimulus isn't the only thing that works, the right because it helps debtors at the expense of creditors.
Sometimes the problem with politics is that people won't take half a loaf. Sometimes the problem is that people won't even take a full loaf if it means the other guys also get one.