Japan would be well advised to take the advice given them by this recent ING publication authored by Tanweer Akram with a large pinch of salt.
The one good bit of advice is that Japan should not “obsess about fiscal consolidation”. That is simply a re-wording of Keynes’s entirely correct observation: “Look after unemployment and the budget will look after itself”.
But its downhill from there on. For example Akram tells the Japanese (p.24) to “increase the public investment share of real GDP”. Why on Earth? If there was evidence that Japan had insufficient public investment, then OK. But Akram produces no such evidence. In fact Japan is littered with examples of EXCESS investment in public sector stuff: those famous “bridges to nowhere”.
Next, the Japanese are told to focus on policies that “promote labor-intensive aggregate demand”. Well I’m afraid the idea that concentrating on labour intensive activity creates more jobs than capital intensive activity is a hoary old myth. Reason is that there are only about three ultimate costs of which labour is much the biggest.
What I mean by “ultimate cost” is this. In the case of capital intensive production, the capital equipment requires labour and capital equipment for its production. And the latter capital equipment requires labour and capital equipment for its production. And the latter capital equipment requires labour and capital equipment for its production. Get the picture? The ULTIMATE cost is labour. So the amount of work created by spending $X on a capital intensive activity is ultimately the same as that created by spending $X on a labour intensive activity.
As to how many “ultimate costs” there are, that’s a bit debatable. There are arguably four: labour, interest for capital, rent for land and profits. However, interest on capital and profit could be construed as the “labour” of the entrepreneur. So there are arguably between two and four ultimate costs depending on your definitions.
So to put it more accurately, there is no reason to suppose that ratio of ultimate costs involved in labour intensive activity is any different to the equivalent ratio for capital intensive activity. Thus the idea that spending $X on labour intensive activity ultimately creates more jobs than spending the same amount of capital intensive activity is not true.
The above point about capital / labour intensivity being irrelevant is certainly true for a closed economy. As to open economies, the point is basically also true – it’s just that the arguments are a bit more complicated. For example if a country spends on capital intensive activity, a fair proportion of the capital equipment can be IMPORTED. And that of course creates work abroad rather than at home.
However, that just causes a deterioration in the balance of payments, which depresses the currency relative to other currencies, which (if market forces are working) will bring the balance of payments back into balance.
Next Akram advocatres “large-scale employment programs — in health care, services for the elderly, environmental protection….”. Well hang on – governments already spend large amounts on “health care, services for the elderly and environmental protection”. What’s the point of “employment programs” that duplicate that effort?
Given a GENERAL EXPANSION in Japanese GDP, both private and public sectors will expand. And expanding the latter will AUTOMATICALLY bring an expansion in spending on “health care, services for the elderly and environmental protection”. It’s all hogwash.
Of course Akram could have argued that if the economy is at capacity, i.e. the point where attempts to boost economic activity result in inflation rather than additional output, there is arguably a case for his “large-scale employment programs”. Unfortunately he is light years behind the times on this subject. He is still wet behind the ears. Put another way, he has almost got as far as understanding the opening sentences of this work of mine that looked at “large-scale employment programs”.
Hopefully he will study the literature on this subject before expressing any more views on it.