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New School University Race to the Bottom
I found a story in Saturday’s New York Times that I think epitomizes the crapification of higher education in the United States. It concerns the New School, where I taught at the graduate faculty from 1969 to 1972 (when it was still called the New School for Social Research).
Sharon Otterman, “Facing Budget Troubles, Some Colleges Look to Sell the President’s House,” The New York Times, February 16, 2024.
The New School wants to sell its presidential residence in Manhattan for $20 million. It joins other small colleges that are turning to their real estate to help them through budget troubles.
The president of the New School in Manhattan is about to lose an extraordinary perk: a five-story West Village townhouse that for decades has served as the university head’s official residence.
The school, which projected a $52 million budget shortfall for the 2024 fiscal year, is asking $20 million for the home as it seeks to stabilize its finances. The sale comes as shaky student enrollment, inflation and other forces are threatening smaller colleges in New York City and around the country. To stay healthy, some have sought to sell off real estate assets to shore up their balance sheets.
The New School’s building, on a residential block of West 11th Street, is especially valuable. It has also become a symbol of administrative bloat and arrogance to some at the college, a historically progressive, century-old institution with about 10,000 students.
Nearly 90 percent of the New School’s faculty are part-time adjunct professors, some earning as little as about $6,000 per course, union leaders said. Dwight A. McBride, who resigned as the university’s president last summer, earned a total of $1.4 million annually, according to federal tax forms.
“We can’t even wrap our heads around what would it be like to live in a $20 million house,” said Annie Larson, a union leader who is also a knitwear designer and an adjunct professor at the Parsons School of Design, the largest of the New School’s multiple colleges. “The disparity is incredible.”
When news that the house would be put on the market was announced at a recent faculty meeting, those in the room broke out clapping, said Sanjay Reddy, the chair of economics at the university. He has independently analyzed the school’s finances, and welcomed the decision.
It was quite a shift from the rancor that erupted during a grueling strike by part-time faculty for better wages in 2022, which shut down classes for three weeks, and the anger that accompanied the school’s decision to lay off 122 clerical and other staff members in October 2020. “It’s mainly symbolic,” Dr. Reddy said of the home’s sale, “but I think it’s still very, very significant because every million counts. As they say, a million here, a million there, and soon you’re talking real money.”
In New York City, major research universities with large endowments like New York University and Columbia have been growing their real estate portfolios and transforming blocks and neighborhoods. But as the number of students heading to college has dropped in the wake of the coronavirus pandemic and as the New School and other less wealthy institutions fight for students, more have been turning to real estate sales as a way to plug budget gaps and buoy endowments.
A sleek new 34-story rental apartment building recently opened on a former playing field on Long Island University’s Brooklyn campus, built through a university deal with a private developer. St. Francis College in Brooklyn sold its campus on Remsen Street in Brooklyn Heights for $160 million in 2023 and moved to new quarters in Downtown Brooklyn. And while the City University of New York still owns hundreds of buildings, it has also recently decided to sell off the homes of some of its college presidents.
Last year, CUNY sold the president’s house at the College of Staten Island for $1.3 million, and in 2022, it sold a $2.3 million condo used by the Medgar Evers College president. It is now in the process of selling similar homes at Queens College and Lehman College.
A CUNY spokeswoman, Kathleen Lucadamo, said the sales “were driven by CUNY’s decision to move away from presidential housing as part of recruitment packages for presidents.”
Mitchell Moss, a professor of urban policy and planning at N.Y.U., said the moves made sense for the schools. “Their job is to provide facilities for students to learn in, not for presidents to live in,” he said. “We are well past the age of afternoon tea in the president’s mansion.”
The New School for Social Research was founded in 1919 by a small group of prominent American intellectuals and educators who wanted to take a different approach to studying the social problems of the 20th century than was possible in traditional universities.
The school has since grown to include its multiple colleges, including the Parsons School of Design, its most financially successful college, the College of Performing Arts and the Eugene Lang College of Liberal Arts.
Lacking a large endowment, the New School is heavily dependent on tuition revenue. Located in one of the most expensive neighborhoods in the country, it charges at the top end for American schools, with an estimated total annual cost of $85,000 for a full-time undergraduate student living on campus last school year, according to the National Center for Education Statistics. Nearly all students get some form of financial aid.
To keep its classrooms filled, the New School has been less selective than some of its better known neighbors, admitting 57 percent of those who applied for the fall of 2022, compared to 12 percent at N.Y.U., statistics show. More than a third of its students in 2022 were international. Half of the undergraduate students who entered the school in 2018 did not graduate within four years, its statistics show.
The university has also been spending heavily on debt payments, after borrowing more than $300 million to build a new flagship building on the corner of Fifth Avenue and 14th Street. The school had high hopes that it would generate significant revenue from student dorms, but that has not panned out as well as planned, Dr. Reddy said.
Several students interviewed at the school said Wednesday that they were frustrated by how the university seemed to manage its money. Despite the fancy new building, and a tuition of just over $50,000, the students were being asked to pay for things like art supplies and tickets for concerts in music critique classes.
They said some dorms had issues with mold and that other classroom buildings needed work. Many had sympathy for professors who had gone on strike.
“There’s an interesting priority of, you know, an opulent building instead of paying workers,” said Sawyer Strain, 20, a sophomore studying strategic design and management at Parsons.
Dr. McBride, who is now a professor at Washington University in St. Louis, was replaced this summer by an interim president, Donna Shalala, a former Clinton cabinet official. Dr. Reddy said that Ms. Shalala had shown interest in reining in costs that were not considered before, including selling the house she is living in.
As it searches for a new president, the school is looking for someone with “financial acumen” and “a record of sustained fund-raising success,” according to the public job posting. The salary range is $750,000 to $1.1 million.
A New School spokeswoman, Amy Malsin, said the school had a plan to make it through its current troubles. “We are confident in our ability to stabilize the university’s finances and are taking all necessary steps to ensure that outcome,” she said.
When I was there all the economics (and I think the other) faculty members were full time. But as universities have bloated their bureaucratic administrative overhead, their cost squeeze has forced them to shift to part-time instructors – “Visiting Professors,” they’re called. The NYT article reports that: “Nearly 90 percent of the New School’s faculty are part-time adjunct professors, some earning as little as about $6,000 per course, union leaders said. Dwight A. McBride, who resigned as the university’s president last summer, earned a total of $1.4 million annually.”
I myself had gone to graduate school at New York University half a mile away. I must say that at that time most of my professors already were part-timers. But actually, they were the ones that turned out to be the best, because they all had real jobs working in the real world – at the United Nations, the National Bureau for Economic Research and other actual working relationships.
By far the worst professors were full-time professors – meaning unrealistic academics, given the fact that I was in the economics department. The full timers were hopelessly incompetent for monetary theory, trade theory. Students were penalized for raising real-world points to criticize the junk economics that already was being taught in the mid-1960s. I got a C or C- in monetary theory for criticizing the Loanable Funds theory, and had to retake my PhD orals for criticizing Carl Menger’s barter theory of money. In effect, I was told, “Who are you going to believe: your own experience and history, or what the textbooks and professors say?”
The difference is that today’s “visiting professors” are not experienced professionals teaching because they like it. They are recent PhD graduates – finding few full-time jobs available at any universities. So students get the worst of both worlds: orthodox crapified neoliberalism and part-time faculty just trying to scrape by. There are news stories of some U.S. professors sleeping in their cars because they can’t afford to rent apartments.
The New York Times study focused on how the New School is trying to scrape through its budget deficit by selling the $20 million house that was used by the president. That amounts to half of the $40 million annual deficit.
That brings up another experience I had. In 1970 or 1971 I was paid $13,000 a year. Not much – so the Dean of the Graduate School gave me a contract to calculate how much the New School would make by merging with the Parsons School of Design across the street. I explained that the merger was basically a real estate deal, and said that the New School would do very well, because the property would be tax-exempt. And that’s just what has happened.
That’s because part of the crapification process is that universities in New York City have basically become real estate companies that hold classes in some of their property in order to get tax exemption on the remainder. Columbia University owned the land under Rockefeller Center before selling it to the Japanese at a vastly overpriced deal (on which the buyers lost their shirt). New York University owns most of the property round it – which it has used to destroy the cultural life that used to characterize Greenwich Village and 8th Street by raising rents to drive out the book stores, drive out the record stores, drive out everything cultural and replace them with shoe stores and whatever large corporate companies could meet the high rent demands.
There was no idea of universities trying to subsidize the kind of stores that would actually upgrade life in their neighborhood. Today block after block of vacant boarded up stores is what greets the NYU neighborhood, from 8th St. to Bleeker Street. Columbia is the same.
Universities through the US have held their actual professorship personnel stagnant while adding and adding to bureaucrats. These PMC members – Professional Managerial Class – are paid more in proportion to how much they can pay the actual content providers less. I’m told that this is as true of Harvard as it is in New York and elsewhere. It’s an economy-wide phenomenon. And the same seems to be the case in London, according to my friend Steve Keen.
Even so, the New School had to begin laying off 122 clerical and staff members in October 2020, and in 2022 there was a strike of student aides. This too has become a nation-wide phenomenon.
The GDP reports all this as soaring productivity – that is, what should be called Gross National Cost, not “product.” The New York Times article reports that Located in one of the most expensive neighborhoods in the country, it charges at the top end for American schools, with “an estimated total annual cost of $85,000 for a full-time undergraduate student living on campus last school year.”
That’s why President Biden says that the U.S. economy is booming!
The post New School University Race to the Bottom first appeared on Michael Hudson.
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Five and a Half Super Scenarios for the Year of the Dragon
Published in Japan Forward January 3rd 2024
Enter the Dragon, a symbol of dynamism, wisdom and strength. Let’s hope it lives up to its billing.
In 2023 normality resumed, or so it seemed. People stopped talking about Covid. No prime minister was assassinated. Inflation fell to reasonable levels in many developed countries.
Concerns about a Taiwan emergency faded as Russia’s stalemated invasion of Ukraine demonstrated the risks of military adventurism. Despite concerns about a full-scale war in the Middle East, the oil price fell, and America’s Dow Jones Index hit an all-time high.
In other words, 2023 was, as predicted here, a “Pinker year”, named after the optimistic Harvard University professor Steven Pinker, rather than a “Roubini year”, named after the apocalyptically pessimistic author of “Megathreats”, Nouriel Roubini. Could there be some dragon magic in 2024?
Peter, Paul and Mary: Puff The Magic Dragon
Probably not. The geopolitical and economic fault lines are still there and could generate massive disruption at any time. They are currently held in check because everyone is aware of the dire consequences.
Our other predictions proved to be a mixed bag to say the least. The hope that the Brave Blossoms, Japan’s rugby team, would take a big scalp in the Rugby World Cup, as they had in the previous two competitions, was not realised. This was particularly disappointing as Japanese sportsmen such as Shohei Otani in baseball and Kaoru Mitoma in football (“soccer” to some) have been in sensational form.
It was noticeable that Japan’s rugby team contained quite a few veterans who had lost the speed and energy of previous years. Could it be the case that considerations of seniority are holding back the rugby team, while Otani and other Japanese stars overseas can give free rein to their natural talents?
As forecast, it was a bumpy year for the huge ESG (Ethical, Social, Governance) lobby, which has run into heavy political crossfire in the United States. One of the harshest critics of the concept is Professor Aswath Damodaran of Stern Business School, who recently described it as “born in sanctimony, nurtured with hypocrisy and sold with sophistry.”
His point that an “unconstrained” mandate– one that can invest in all stocks – will eventually deliver better returns than one that excludes supposedly “bad” industries is unanswerable.
Well wide of the mark were our expectations about the currency market and domestic Japanese politics. Rather than rising as anticipated, the yen spent most of the year in the 140 to 150 range, as U.S. interest rates stayed remarkably high for a remarkably long time – leaving many forecasters, ourselves included, feeling blue.
Meade Lux Lewis: Dragon Blues
An early exit for Prime Minister Kishida seemed likely simply because that is historically what tends to happen after a long stay in power by a strong leader like the late Shinzo Abe. Yet Kishida has managed to cling to power despite sagging support ratings and a series of low-grade scandals.
According to investment guru Howard Marks, being too early is the same as being wrong. We were definitely wrong about the yen and domestic politics, but perhaps that was a case of being too early and the failed predictions of 2023 will be bang on the nail in 2024.
After all, the fundamentals are still in place. The Japanese yen is still extraordinarily cheap in purchasing power terms and the U.S., with a presidential election looming, is about to embark on a cycle of interest rate cuts. Likewise, Kishida is suffering the fate of many weak Japanese prime ministers: getting caught between the priorities of the powerful financial bureaucracy and the desires of the public. If he does go, there is a sporting chance that his successor could be Japan’s first female prime minister, as suggested here last year.
The same could be said of our view that China would “pivot” to pragmatism in the Year of the Rat. That turned out to be half-correct, at best. Yes, the Chinese leadership has dialled down the “wolf diplomacy” and sought more stable relations with the United States at a meeting between President Joe Biden and Chairman Xi Jinping.
Yet strong measures to stimulate the domestic economy, which is suffering from the collapse of a gigantic real estate bubble and traumatized consumer confidence, have yet to appear. Surely, they must though, as prolonged youth unemployment and deflation can only erode support for the regime. The barometer will be the Chinese stock market, which has been such a disappointing performer in recent years.
FIVE AND A HALF SCINTILATING SCENARIOS
Increasingly Cosmopolitan Japan
Towards the end of 2024, Taiwan Semiconductor (TSMC), the world’s largest manufacturer of highly advanced semiconductors, will open a plant in Kyushu, Japan’s “silicon island”. It has already started work on a second plant, and there is talk of a third. Taiwanese engineers have been transferred to Japan, and Japanese recruits – whose pay is well above the local norm – are being sent to Taiwan for training.
This move is driven by geopolitics, specifically the risk of China making a move on Taiwan, but in a wider sense the same dynamic is requiring Japan to be more open, more Asian and more influential. Shrinking, or being perceived to be shrinking, is a dangerous path to tread. It was the strategic far-sightedness of the late prime minister Shinzo Abe that led him to open up the labour market to foreign nationals.
Interestingly, it will soon be possible for foreigners to take the Japanese exams for taxi and bus driving, which are under the authority of the Police Agency, in any one of twenty foreign languages.
Japan is facing a structural shortage of labour, and the transportation and delivery businesses are amongst the worst affected. Importing labour is the obvious solution. Opinion surveys by Pew Research and NHK, the national broadcaster, show that the Japanese public is more appreciative of foreign workers than most European countries and sees their contribution as a net positive.
The number of foreigners in the workforce has doubled over the last decade, thanks to Abe’s reforms, but the overall scale is still small at 1.8%, with the Vietnamese taking over from the Chinese as the largest ethnicity. From here, the increase could be quite rapid, given the encouraging attitude of the Japanese authorities and the tendency of immigrant communities to grow fast once critical mass is reached.
Like it or not, Japan is now a more strategically important player than ever before in the post-war era, and stands as an antithesis, though not necessarily an enemy, of Xi Jinping’s China.
It has fulfilled that role before. In the early twentieth century, Chinese dissidents and intellectuals – including Chiang Kai-shek and Sun Yat-sen – based themselves in Japan for long spells. Something similar could happen again, this time including Chinese tech billionaires and wealthy Hong Kongers as well as writers, journalists and artists.
Apple Swoops
Japan’s stock market culture has undergone significant change over the last two decades, with new proposals, reforms and codes coming thick and fast recently. The result has been to transform the relationship between companies and investors.
One noteworthy example is the new protocol for takeovers, set out by METI, the Ministry of Economy, Trade and Industry. Taboo for a long time in Japan, hostile takeovers should now get the green light if sufficient value is created for the shareholders of the target company – meaning that the price is high enough.
And in fact that is what happened in August 2023 when electric machinery company Nidec launched an out-of-the-blue bid for Takisawa, a smaller company that produces machine tools. Takisawa’s initial response was to reject it, but Nidec, citing the METI document, won the argument.
How can companies protect themselves from being taken over? Easily – by removing themselves from the stock market and going private. In fact, several well-known companies did exactly that in late 2023, taking the MBO (Management Buy Out) route to a takeover-free existence. Others may follow, deciding that the increasing hassle and risk of being listed is no longer worth it.
What about a large-scale international takeover using the METI playbook? It seems that top staff of Microsoft discussed buying Nintendo before deciding on Activision Blizzard. Given the huge scale of the market capitalization of the “Magnificent Seven” (Apple, Tesla, Nvidia, Microsoft, Alphabet, Amazon, Meta) not even the most iconic Japanese companies could be safe from their clutches. Any one of them could attack like a dragon.
Queen: Dragon Attack
Back to Deflation
Japan’s Producer Price Index soared to +10% in December 2022, the highest level since 1980. One year on, it has collapsed to +0.3% – and further declines are certain, given the falling oil price and stronger yen.
Producer prices, the costs that companies incur when they buy their inputs, are more volatile and quicker to respond than consumer prices, but they do signpost the direction of travel. If they sink into negative territory and stay there – as is likely – it will probably mean that inflation is past its peak for consumers too.
That is not necessarily a bad thing. Indeed, it could set off a mini boom as prices flatten out while wages continue their steady rise and Japan’s terms of trade improve. On the other hand, it could give the Bank of Japan a headache as its inflation target of 2% on a sustainable basis will not have been realised.
Nicer and NISA
The world’s first properly organized futures market opened in 1710 – in Osaka, Japan. Two centuries on, Japan’s defeat of Imperial Russia in 1905 could not have happened without the bonds it floated in the U.S. and Britain to finance warships and weapons. Which is to say that Japan has been financially sophisticated for a very long time.
So there is no reason why the new NISA (Nippon Individual Saving Account) should not, over time, be as big a success as its model, the UK’s ISA. Certainly, the government has set a super-bullish target, expecting the total amount of these tax-free accounts to reach 34 million in five years with assets doubling to 56 trillion yen.
Most people will invest via funds, and there appears to be a strong attraction towards the best performers of recent years, US and Indian equities. Yet, if financial weekly Veritas is to be believed, there is significant interest in Japanese small and medium stocks too.
Japan’s once thriving equity culture took a heavy hit from the collapse of the 1980s bubble economy and the consequent long years of stagnation. That is ancient history now, and the NISA scheme, due to start in in early 2024, should mark the start of a new phase of Japan-style shareholder capitalism.
Green Resistance
As governments across the developed world prepare their citizens for the coming of “net zero”, with all the changes in lifestyle it implies, resistance is starting to mount. Already populist parties in many European countries are using the issue to gather support. The stock prices of many illustrious auto companies are telling a disturbing story – they have no future in this brave new world. Meanwhile, China – by far the largest exporter of electric vehicles – has an energy mix that is 80% fossil fuel, mostly coal.
Most governments have signed up to bans of various kinds on conventional ICE cars, but as the deadlines get closer, many will be tempted to push them out further, as the UK has just done. The most important actor is the United States, and what happens there will be significantly impacted by the upcoming elections. Despite the tremendous success of Tesla, only 8% of U.S. auto sales are EVs. The other 92% are not.
Globally, the production of gasoline is at an all time high. So much for the “Just Stop Oil” campaign.
The energy transition is undoubtably underway, but governments have sought to compress the necessary timeframe by using a panoply of carrots and sticks and now risk facing a backlash. Japan has been far from blameless. In 2020, the government went along with the Europeans in pledging deep cuts in emissions, which would take them down to 46% of 2015 levels by 2030.
That was totally unrealistic, given Japan’s topography. Even now, Japan’s energy mix is 84% fossil fuel, nearly all of which is imported, and EVs have a tiny share of the auto market. If the growing “green resistance” overseas does lead to a more realistic approach to the energy transition, that can only be a benefit to Japan and its industries.
Daniel Yergin, the experts’ expert on energy politics, put it like this in his book The New Map: “Oil will maintain its pre-eminent position as a global commodity, still the primary fuel that makes the world go round…” And quoting David Swensen, legendary head of the Yale Endowment, “if we stopped producing fossil fuels today, we would all die. We wouldn’t have food. We wouldn’t have transportation… We wouldn’t have clothes…”
Let’s hope that prospect remains in the realm of science fiction.
John McLaughlin: Don’t Let The Dragon Eat Your Mother
Bonus Scenario: Medals Galore for Japan at the Paris Olympics
Japan triumphed in the last Olympics simply by holding them in the teeth of the Covid-19 hysteria and a bizarrely negative press campaign. The closing ceremony was unforgettable, with its drone display of the earth in orbit
Undeterred by the outcome of the Rugby World Cup, we expect Japan to do well at the 2024 Paris Olympiad. There are two reasons for optimism. First, Japanese athletes have been performing strongly in a wide variety of sports, from basketball to skateboarding. Second, Olympic host countries usually ramp up their sports budget in the years leading up to the event, and the statistics show that the effect of better training and equipment etc. lasts at least another four years.
Result: Japan’s medal haul should put it within the top four most successful national teams.
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Philosophy You Liked Published in 2023
The year is coming to a close, and so it’s a good time for year-end lists, and Daily Nous is a good place for a year-end list about good philosophy.
I’m not asking you about “the best” new philosophy you read. The idea that we could make such fine-grained comparisons of philosophical quality is doubtful. Plus, it puts too much pressure on people answering, making the exercise less fun.
So let’s keep it relaxed and low stakes. Of the philosophy you read—articles, chapters, or books—published in 2023, which did you like and would recommend others read?
When answering, please follow these guidelines:
- just one or two suggestions each, please
- don’t recommend your own writing
- the works you suggest should have 2023 publication dates
- add a line or two saying what you liked about each work you mention
- include links to the works, if possible
- use your real name (at least your first name) and a verifiable email address (your email address won’t be published)
I’m looking forward to seeing your suggestions.
Posting will be light over the next week.
The post Philosophy You Liked Published in 2023 first appeared on Daily Nous.
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Why China Needs A Dose of Abenomics
Published in Japan Forward 15/11/2023
According to many respected economists, it is just a matter of time before Asia’s largest, strongest economy overtakes the United States as the world’s number one economic power.
Since this ruthless competitor stands accused of engaging in unfair trading practices, the US is resorting to tough protectionist measures. Relations between the two rivals have become dangerously heated, with innumerable books and op-eds appearing and predictions of war being discussed by academics and generals.
Just as the geopolitical temperature reaches boiling point, there is an unexpected development. The Asian nation’s economy is rocked by a collapse in real estate values that drives major developers into bankruptcy and makes people feel much poorer.
Consumer confidence plummets, leading to a “fallacy of composition” – a situation where actions, such as increasing savings, that are rational for one actor can be economically disastrous when taken by all actors.
The result is recession and deflation, exacerbated by a worsening demographic profile. New social pathologies appear. As youth unemployment soars, young males become listless and give up on having careers. Household formation suffers as adult children continue to live with their parents for years.
Most knowledgeable observers expect this economic powerhouse to get back on track before too long, but in fact the growth that had once provoked fear and envy never returns.
That is the story of Japan in the 1980s and 1990s. Is contemporary China about to follow in its footsteps? The big picture parallels are obvious.
In both cases, real estate prices rose to eye-popping levels. In 2021, price to income ratios in Beijing were at 25x and near 20x in Shanghai. In the Japanese bubble, affordability was less strained with ratios over 10x, but that marked a doubling in three years, and price rises in the commercial sector were equally explosive.
It’s hard to make exact comparisons between countries at such different stages of development with their own systems of taxation and finance, but investment scholar Edward Chancellor notes, using data from real estate specialists Savills, that the total value of Chinese real estate is equivalent to 5.5x the country’s GDP.
By comparison, Japan’s land-to-GDP ratio peaked out at 4.8x when the bubble burst in 1991. Any way you look at it, China’s real estate excesses are of a monumental scale and purging them will be a painful process.
So far the deflationary symptoms in China are mild, with small declines in the consumer price index and the GDP deflator. But that was the case in Japan too. Deflation was persistent but never deep, which is why policymakers ignored it for so long. Instead, a risk averse “deflationary mentality” spread in which people came to believe that the natural trajectory for wages, rents and stock prices was down.
There are obvious differences too. One of the most important is that Japan suffered simultaneous real estate and stock market collapses which fed on each other, creating a larger, all-consuming crisis of asset deflation. In contrast, there was a significant lag between China’s double bubbles.
In 2007, Chinese stocks were the most expensive in the world, according to the Shiller price-to-earnings ratio, a long-term measure of value. They soon plunged, and fifteen years later the Shiller ratio has declined from 55x to 10x, making the Chinese stock market one of the cheapest in relation to long-term earnings.
China also has the advantage of being able to learn from Japan’s mistakes. Having been the first major economy since the 1930s to experience a large-scale asset collapse and ensuing deflation, Japan had no such guide and was slow and indecisive in its response.
The Japanese financial authorities did not conduct rigorous inspections of the health of the banks until it was too late, thereby guaranteeing a full-blown banking crisis. Monetary policy was kept much too tight, resulting in a massively overvalued currency, and fiscal policy was abandoned in the late 1990s out of illusory fears of a public debt crisis.
If the Chinese authorities are pro-active and pragmatic, the healing process could be much faster than in Japan. But will they be? The “economy first” approach, associated with the recently deceased ex-premier Li Keqiang, has long been junked in favour of a “politics first” orientation.
Chinese economists have been studying the Japanese bubble and its aftermath for a long time, but in many instances their conclusions are of the politically correct “it couldn’t happen here” type, citing China’s closed currency system and much earlier stage of economic development as sufficient reasons for better outcomes.
For obvious reasons, those inside the system are reluctant to offer criticism or worst case scenarios. If there is a countervailing force, it is likely to be social unrest, an outburst of which seems to have triggered the dramatic reversal in China’s “Zero Covid” policy in December 2022.
According to the China Labour Bulletin, there are roughly sixty million migrant labourers without residency rights working in the construction industry. For reference, in Japan construction investment halved between 1991 and 2010. Significant shrinkage is on the cards in China too.
Recently, Veritas, the Nikkei’s financial weekly, headlined an article about China’s economic troubles with “China’s Lost Three Decades”. That is surely an unlikely prospect. Japan was able to ride out its long spell of deflationary stagnation because of its relatively equal distribution of wealth.
Even today, according to Credit Suisse’s annual Global Wealth Report, the top 1% hold 18% of the wealth in Japan, slightly less than was the case in 2000. In stark contrast, China’s top 1% have gone from owning 20.7% of the wealth in 2000 to 31.1% today, making for a 50% increase in inequality in just two decades.
In fact, there are few societies that would suffer 70-80% declines in land and stock prices with such little social unrest as Japan did. That is not to say Japanese was unmarked by the experience. The suicide rate soared by 50%, with middle-aged men the main victims. But politically, the country was quiescent. No new populist parties appeared on the scene.
There were no moves to raise protectionist barriers or stigmatise foreigners, let alone engage in military adventurism. And with the coming of Abenomics, the number of suicides fell to the lowest level since statistics began.
Historically, though, deflations have been just as socially destructive as inflations. Think of the Showa depression in the early 1930s Japan which led to the era of “government by assassination”. Or the Bruning deflation in Germany, which saw consumer prices fall by 23% in the three years before the Nazis’ election victory in 1933.
Such disastrous economic blunders are unlikely in today’s world. Nonetheless, in the case of a long-lasting deflation, China is likely to present a much greater threat – to itself and its neighbours – than 1990s Japan ever did. Which is why it is in all our interests that Beijing adopts a radical stimulative agenda that stops the deflationary mind set in its tracks, drives the stock market higher, and lifts the spirits of consumers and entrepreneurs.
Call it “Abenomics with Chinese characteristics”, as that is more or less what the late Shinzo Abe accomplished a decade ago, and the Abe bull market continues to this day.
To be sure, China’s problems are not exactly the same as Japan’s, but the common thread is the need to do whatever it takes to combat the malign effects of asset deflation. The alternative does not bear thinking about.