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A tale of two deflations
A tale of two deflations
Japanification is a term that has re-emerged recently. It refers to the prolonged economic stagnation of Japan, which commenced after a financial crash in the early 1990s. The stagnation of Japan has been marked by very low inflation (recurring periods of deflation), stagnating productivity growth and a massive increase in government debt.
However, at the same time as the financial crisis that started the long stagnation in Japan, there was a similar crisis in a small northern country, Finland. Finland had followed such a similar economic trajectory as Japan that it was dubbed the “Japan of the North”. However, while Japan fell into a prolonged economic malaise, the Finnish economy returned to growth just four years after the onset of the crisis (see Figure 1).
What caused the difference between these two outcomes?
Figure 1. Volume of nominal, local currency GDP per capita in Finland and Japan between 1969 and 2018 (1969=100). Note: due to the recurrent deflation periods in Japan, comparisons using the constant (real) GDP per capita are not feasible. Source: GnS Economics, World Bank
The boom of Finland and Japan
Both Japan and Finland were relatively poor countries in the 1950s. Both were on the losing side of the Second World War (Japan had primarily fought against the U.S. and Finland against the Soviet Union) which made them temporary outcasts in the new global political order. After they regained a place in global politics, both established an ambitious industrialization program.
In both countries monetary and fiscal policies, under a regime of currency regulation, were used to channel resources towards industrialization. Capital flows were tightly-managed, and interest rates were set below market-clearing levels. This forced national savings toward investment and allowed for only essential consumption.
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No Wonder We’re Poorer: Wages’ Share of GDP Has Fallen for 46 Years
No Wonder We’re Poorer: Wages’ Share of GDP Has Fallen for 46 Years
The problem is that limiting financialization will implode the system.
The majority of American households feel poorer because they are poorer. Real (i.e. adjusted for inflation) median household income has declined for decades, and income gains are concentrated in the top 5%:
Even more devastating, wages’ share of GDP has been declining (with brief interruptions during asset bubbles) for 46 years. That means that as gross domestic product (GDP) has expanded, the gains have flowed to corporate and owners’ profits and to the state, which is delighted to collect higher taxes at every level of government, from property taxes to income taxes.
Here’s a look at GDP per capita (per person) and median household income.Typically, if GDP per capita is rising, some of that flows to household incomes. In the 1990s boom, both GDP per capita and household income rose together.
Since then, GDP per capita has marched higher while household income has declined. Household income saw a slight rise in the housing bubble, but has since collapsed in the “recovery” since 2009.
These are non-trivial trends. What these charts show is the share of the GDP going to wages/salaries is in a long-term decline: gains in GDP are flowing not to wage-earners but to shareholders and owners, and through their higher taxes, to the government.
The top 5% of wage earners has garnered virtually all the gains in income.
The sums are non-trivial as well. America’s GDP in 2015 was about $18 trillion. Wages’ share–about 42.5%–is $7.65 trillion.
If wage’s share was 50%, as it was in the early 1970s, its share would be $9 trillion.That’s $1.35 trillion more that would be flowing to wage earners.
That works out to $13,500 per household for 100 million households.
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