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Abenomics: works in Japan, rejected by Osborne – and now Balls

Balls saysSince Shinzo Abe came to power, the Japanese stock market has risen an astonishing 50% in 5 months, and the replacement of the fatalism which has dogged Japan’s economy by a new burst of policy activism has profound implications for the UK. There is another precedent for this policy activism other than the General Theory of John Maynard Keynes in 1936 which transformed Western macroeconomic thinking till the high inflation of the 1970s caused by the sudden quadrupling of the oil price by the Shah of Persia and OPEC led to the eclipse of Keynesian stimulus theory and the rise of neo-liberal ultra-free-markets capitalism.

Keynesian analysis of course was not disproved by the 1970s experience because it was never designed to deal with hyper-inflation, but rather with the serious and prolonged loss of demand in a depression. That situation is now being repeated today, which is why Keynesian stimulus policies are once again highly relevant. But there is a Japanese precedent here too.

Like other countries in the 1930s, Japan suffered persistent deflation, an over-valued currency and export markets flattened by the US crash of 1929. The Japanese finance minister, Korekiyo Takahashi, responded by taking Japan off the gold standard, driving up government spending, and making the central bank finance it.

As a result Japan recovered faster than any other major economy. The fiscal stimulus pushed up demand, and against that background of expanding demand private sector investment rose aided further by low interest rates, while the devalued yen stimulated exports. Japan’s GDP then grew by a stunning 50% in 4 years 1932-36.

There is another precedent from that time too. After the ill-fated Labour government of 1929-31 was induced by the rigid balanced-budgeting of Montagu Norman’s Bank of England to tackle the deficit by swingeing cuts in public expenditure including ynemployment benefit, Britain was forced off the gold standard by the Invergordon Mutiny on the Clyde and the incoming Tory chancellor, Neville Chamberlain, devalued sterling in 1932 and centred his monetary policy on raising prices back again to the level of 1929 in defiance of slump-obsessed bank orthodoxy. As a result British GDP grew at the dramatic pace of 4.5% a year between 1932-36.

The unequivocal moral of this dual experience of Japan and the UK in the 1930s is that today’s austerian flat-earthers are pursuing diametrically the wrong policies. A programme of prolonged fiscal austerity combined with a low inflation target beloved of bankers and overseen by a rigidly traditionalist Bank of England is the precise reverse of what is needed today. Just compare the differential experience of Japan and UK 1932-36 with the UK 2009-13.

It must be one of the great tragedies of modern history that Japan Japan has learnt the manifest lesson of the 1930s, yet Britain has not, to the shame not only of Osborne but also of Balls too.

4 Comments

  1. Rob says:

    It’s getting very hard to find a reason to vote Labour or Tory, I’ve given up to be honest if I do vote because I’ve always done it then I suspect I’ll vote UKIP they will not get in of course but somebody has to get another real party to break up this two Labour cartel

  2. Rob says:

    It’s getting very hard to find a reason to vote Labour or Tory, I’ve given up to be honest if I do vote because I’ve always done it then I suspect I’ll vote UKIP they will not get in of course but somebody has to get another real party to break up this two party cartel

  3. Uglyfatbloke says:

    Worth bearing in mind that Keynes was mistaken. it was WW2 that revitalised the US economy, not government stimulus packages.

  4. Matty says:

    I disagree with the ugly one – Roosevelt took office in 1933. GNP was 34% higher in 1936 than 1932, and 58% higher in 1940.

    As for Rob, UKIP is even more right-wing than the Tories. Their policy document on welfare describes benefit claimants as “a parasitic underclass of scroungers”.

    UKIP’s welfare policies include forced unpaid work for all Housing and Council Tax Benefit claimants, Incapacity Benefit (now ESA) slashed to Job Seeker’s Allowance rates and childcare support for working parents demolished.

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