A spectre is haunting Japan – the spectre of deflation. With this ironic twist on the Communist Manifesto, we are witnessing the downside of capitalism in Japan. An article in the NYTimes by Martin Fackler chronicles the recent decline in the economic output in Japan and the hardships it is creating. Caught in a business cycle with no upside in sight, the Japanese economy has fallen behind China’s. The original Asian Tiger, even before that term was in vogue, is little more than an old alley cat.
The article paints a dark, painful picture of people living in a multi-storied home on only a few hundred square feet. In our world of mega-mansions, this is little more than a master bedroom closet.

The downsizing of Japan’s ambitions can be seen on the streets of Tokyo, where concrete “microhouses” have become popular among younger Japanese who cannot afford even the famously cramped housing of their parents, or lack the job security to take out a traditional multidecade loan.
These matchbox-size homes stand on plots of land barely large enough to park a sport utility vehicle, yet have three stories of closet-size bedrooms, suitcase-size closets and a tiny kitchen that properly belongs on a submarine.

The fall from economic grace is not only depressing in financial terms but also in human terms.

Japan’s loss of gumption is most visible among its young men, who are widely derided as “herbivores” for lacking their elders’ willingness to toil for endless hours at the office, or even to succeed in romance, which many here blame, only half jokingly, for their country’s shrinking birthrate. “The Japanese used to be called economic animals,” said Mitsuo Ohashi, former chief executive officer of the chemicals giant Showa Denko. “But somewhere along the way, Japan lost its animal spirits.”
“Deflation destroys the risk-taking that capitalist economies need in order to grow,” said Shumpei Takemori, an economist at Keio University in Tokyo. “Creative destruction is replaced with what is just destructive destruction.”

But against this effect of the economic downturn, the story points to another adaptive change.

Deflation has also affected businesspeople by forcing them to invent new ways to survive in an economy where prices and profits only go down, not up.

There’s not much more said about this, but, given the general tenor of the story, I would expect economists to see it as a wholly negative consequence. Imagine people learning to live with less. Horrors. I am sure that this change is painful and difficult, but perhaps there is an upside to it. As a fully vested member of the sustainability club that doesn’t believe that we can grow our way out of unsustainability even with expected gains in efficiency, I see this protracted period of behavioral and attitudinal adaptation as an important experiment in testing ways to shrink our material economies. I am not familiar with any sociological or psychological work that has looked more closely at the impact on individuals, but hope that some scholars might have seen this unplanned social experiment as a unexpected research opportunity. The more we can learn about the actual impact of economic stasis or shrinkage on people, the more we can design transition strategies to enable all the billions of us to live and flourish on a single, finite planet.

One Reply to “Learning the Hard Way”

  1. Hello Mr. Ehrenfeld,
    I read the article on the grim predictions for the US economy in the New York Times. Things are not so grim as you would believe.
    Below is a proof that the cost of borrowing for a nation if it borrows from itself is relatively zero. I currently offer Canadian $50,000 to
    any person that can find the fatal flaw in this argument. No one, not even one of the many economists who know of the idea, has ever found
    that flaw even with the generous financial inducements.
    So if I am correct, if the financial costs of taxation are exorbitantly high and the benefits nil, why does any nation tax those funds required for public expenditures?
    It would be far better for any state to abolish taxation, to release the economically productive efforts that taxation crushes, and start
    borrowing the whole of its expenditures without inflicting injury upon the finances of the nation.
    I welcome your comments are I am eager to give away the money so that I can put an end to the time dedicated to this seemingly absurd idea.
    Gary Marshall
    57 Irwin Avenue
    Yorkton, Saskatchewan
    S3N 2E4
    Tel. 306 621 0214
    There is a big problem in present economics. An assumption was made a long time ago that Taxation is the best means of raising capital for government expenditures.
    I argue that it is not and never has been. By a very simple calculation, the financial costs of Taxation to a nation are incredibly great and the benefits nil.
    To find the truth, all one need do is add up the financial costs and benefits of taxation. If benefits exceed costs, then one retains
    taxation. If not, then you discard it and choose an alternate method of funding Government expenditures.
    I am not here talking about government expenditures or how the government empties its money bag, only about how the government fills
    up its money bag.
    To add up the numerous costs of Taxation would be a long and difficult exercise. It may be easier to assess the benefits and then proceed.
    So, what are the benefits of Taxation? What is the payoff that surpasses all costs?
    For an answer, one may look to the commonplace purchase of a home.
    To buy a $100,000 home, one may pay cash or like most borrow.
    If the buyer pays cash, his personal financial assets will decline by $100,000, and he will obtain title to his new home.
    If the buyer borrows, his financial debts will rise by $100,000, he will obtain title to the home, and he must then pay interest on the
    borrowed money.
    Both buyers obtain title to the home. Both see their finances take a large hit. The only difference to be found between the two is that the
    borrower must pay interest on the loaned funds.
    So, the financial benefit to one using personal funds to buy a home is interest savings; interest the cash buyer need not pay on money he chose not to borrow.
    Some may argue that the borrower must also repay the principle. This is correct, but it does not alter the resulting benefit. The cost to
    the borrower would be any amount of principle paid down, and the benefit would again be the consequent interest savings.
    By equating Taxation with using personal funds, the benefit of Taxation for a nation becomes interest savings. When the Government funds expenditures through taxation, the nation is freed from having to supply money to pay interest on funds otherwise borrowed.
    Suppose the Government needs $1000 for some service. It can borrow the funds or tax.
    If the government tax, then the people and corporations of the nation are out $1000, and the nation receives its service.
    If the government borrows the $1000, from US residents and in US currency, the nation’s debt will rise by $1000, and the nation receives its service.
    However, in borrowing, the nation�s financial assets will also rise because US resident lenders now hold an IOU for the $1000 loaned.
    If the government were to borrow $100 to pay interest to its resident bondholders, the national debt would rise by a further $100.
    And so would the financial assets of the nation because the new lenders of the $100 would receive a note for exactly the same amount.
    If the creation of a debt for a nation also creates an equivalent asset for the nation, and the payment of interest also, the financial
    benefit of Taxation, that is interest savings, is nullified.
    If the government were to borrow every penny it spends from resident US citizens and the interest as well, the wealth of the nation would be unaltered in the transaction. A rise in the nation’s debts would always perfectly balance with a rise in the nation�s assets.
    Therefore, Taxation has no benefit, financial or otherwise. In fact, for a nation, any nation, Taxation is all cost and no benefit. That is
    if the cost of borrowing for a nation is in effect zero, taxation has no benefit.
    What would happen to the finances of nation were the government to abolish taxation and begin borrowing all of its expenditures?
    Two important obligations now come into play:
    One: that Government will now have a capital charge. In the present, when government furnishes a good or service, one is never sure the
    money expended in the effort bears a calculated return, a return that surpasses all costs. With taxation abolished and a market borrowing
    rate of 7%, the government will have to earn at least that rate of return on its expenditures.
    Two: the government will have to face the nation every time it requires funds. Under Taxation, it can take the funds and do as it pleases. With its abolition, needy government will learn very quickly not to mistreat its petulant banker.
    These 2 factors will create a revolution in how government operates.
    The costs of government would certainly contract.
    Wasteful expenditures would decline rapidly as the return on any expenditure must exceed the capital charge. There would be no more tax collection, no subsidies to favoured industries or persons, far less corruption, far fewer regulators, far fewer and much smaller government departments, far greater controls on enduring expenditures, and the use of service fees to curb abuse of public resources.
    In a government with annual expenditures of $300 billion, savings of $100 billion could easily be had.
    And what would happen to the other side, to the financial assets of all US citizens and corporations:
    Taxation is a deterrent. It deters one from doing what he would normally do were there no taxation. Without this burden, there will be all lot more worthy economic activity and far less of the other kind.
    There would be no taxes to pay and no papers to file, no taxes in the prices of goods, no tax distortions or burdens in the labour, financial or commercial markets, far less needless regulation and interference, more open and competitive markets, few inequities.
    In my home country of Canada, with savings from annual government expenditures combined with the increased assets of the taxpayer, over 4 years, I estimate very conservatively the accumulation of $1 trillion in wealth with the abolition of taxation.
    Cumulative Liability $200B $430B $ 694B $ 986B
    Cumulative Asset $400B $880B $1443B $2076B
    In the US, you can multiply everything by 10, which means a conservative increase in wealth of about $10 trillion in just 4 years.
    Over those 4 years, the nation through its government will acquire a much greater financial debt, but it will create financial assets that
    at least double that burden.
    In conclusion, I want you to remember 2 things:
    The cost of borrowing for a nation is zero if it borrows from its citizens. Therefore taxation is all cost and no benefit.
    The nation is wealthier everyday subsequent to the abolition of taxation.

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