How the US broke Japan’s economy – Kenneth Rogoff

How the US broke Japan’s economy – Kenneth Rogoff

okay so let’s talk about Japan which you also cover in uh the book or their crisis and you blame the US’s pressure in advance of that crisis on uh on the Japanese to raise the value of their currency um the actions by the Bank of Japan zooming out how much of the crisis is not caused by things like that but just the fact that high-tech manufacturing as a share world output was becoming less important there’s demographic factors as well and so something like this was sort of bound to happen to Japan uh even if there wasn’t some big crisis that preceded it south Korea’s GDP per capita isn’t that high either so at least in comparison to the US so yeah how much of this is like actions taken by specific actors versus I mean South Korea’s had a crisis in 1983 and 1997 i mean they haven’t been crisis free by the way that they’re well there are a lot of factors the demographics would be the most obvious one the rise of China the rise of not just China Korea other competitors so Japan invented this business model that I think a lot of countries have duplicated the business model was export-led growth and the thing that maybe most people wouldn’t think about in that is it creates competition most countries aren’t as big as the United States and there aren’t as many different firms trying to do the same thing and of course we have trouble with competition here i mean sort of famously in Mexico sometime there were you know two or one telephone companies two bread companies two taco companies it’s very hard not to let monopolies sit use their political power so how do you get around that and the thing that Japan did that was really pretty innovative germany did it I think to some extent also was in the export sector you are competing with the world not just with other companies and that creates this uh innovation this creativity and Japan did really well with that but over time others imitated it and you know sort of took were building some of the things that they were building so that’s part of it the aging is part of it but I think the financial crisis is a very big part of it and what is counterfactual so suppose that crisis hadn’t happened how much wealthier is Japan today than it might other oh I think 50% wealthier per person i think way wealthier that’s where they started i mean it depends on which measure you use by the market exchange rates they were richer than the United States you know late 1980s and even if you use the more complicated measure they were richer than any European country then Germany then France uh then Italy they’ve moved to the bottom of the rung now and I I I think the financial crisis and what okay it wasn’t the only thing but we you know it’s a long story but I think we effectively forced them to move faster to open up and deregulate than culturally and politically they were ready to and I I give that as an example of something in the book where I changed my mind where I had looked at that for a long time afterwards because you know going back to 2005 that’s long after the Japanese crisis i would hear from uh Jang Xiao Min was the president of China that I met we’re not going to let this happen to us there’s no way you know we were discussing I thought maybe they shouldn’t have such a fixed exchange rate and I said ‘Well that’s what the United States you know said to Japan and look what happened in Japan and I you know I didn’t push back that much to someone like that you talk to other people but I I heard that from many people and um I used to think you know well how can that be because all of these things there’s this thing called the Plaza Accord in September 1985 where we push them to make their exchange rate more and I used to say well why you did that in 1985 i mean the crisis happened reinhardt and I Carmen Reinhardt my co-author on uh many things we date the crisis in 1992 it’s 7 years later and I think I continued to think that and but you know I would say over the years and particularly in recent years I’m thinking I was wrong you know these things unfold slowly crises don’t happen overnight they deregulated and it worked but they didn’t know what they were doing and I I think this was a huge mistake by Japan to agree and I actually um uh someone who was at a uh 10th anniversary of the Plaza Accord held in Tokyo uh had the uh who the person who was the head of the Bank of Japan and I apologize I’m 72 years old and I’m forgetting the name exactly of so the head in 1985 and he gave this speech to officials and he went like this and apologized you know very symbolically I I’ve ruined our country i did this i take responsibility and again I thought you know I I mean he told that to when he he read my book and um yeah I you know you financial repression’s bad but financial liber liberalization needs to be done gradually and if you do it too quickly you get a crisis that’s many crises caused by that asking somebody who um uh obviously doesn’t know the details at like a high level how would you explain uh to a novice like basically how could a country be 50% less wealthy than it otherwise might have been simply from financial crisis because if whatever they could have otherwise produced why can they still not produce it or you know like a country is like they’re producing a bunch of things why are they not why are they producing 50% less things because of um a financial crisis a couple decades ago well their case is very unusual although having a number like 10% or 20% is very typical in fact one of my professors at MIT um uh was teaching us the Great Depression and he said “Here’s how to think about the Great Depression we were going like this it’s hard to do without a blackboard but then he says you know then we get here we go like this and then we’re going like this we never got this back you know that happened during there’s a lot of economic models where you you know so empirical No yeah yeah yes yes but um what happens with the financial crisis particularly in Japan is it sort of blew up their business model so for example they maybe China wouldn’t have overtaken them so quickly if they had had been able to borrow and their financial markets were working better and they were more a droid uh their consumption collapsed and Japan didn’t quite know how to deal with it we were we were much more brutal in what we allowed to happen than Japan but we got out of it pretty quickly i don’t quite know where we got back to where we were but we got out very quickly they have a very consensus society they don’t want anyone you know to be in bad shape and their struggle with this I think held them back for a long time okay maybe 50%’s too much and I should say 25 or 30% but a lot better shape uh than than they have been just to put it into context what do you think the counterfactual um wealth of America looks like without 2008 today uh boy that’s a good question and I’m hesitant to because I I probably have some paper giving a number for that and I might say the wrong thing um we certainly cumulatively lost a lot uh and it led to this political crisis that caused us to lose a lot more so I don’t know probably 15% lower a lot a lot a lot lower than it would be because we had all this dynamic which we’re living in right now right is still an echo of that financial crisis now mind you you’re asking about our national income inequality matters and you know would we have done other things and I I don’t want to you know in some ways the uh the 2008 2009 crisis was a condemnation of the system and people could see it and maybe led to some healthy cleansing but I think it led to a lot more damage than healthy cleansing i think this updates me towards the view that financial crisis are even worse than I think like it isn’t just this bad thing that happens and you recover if there’s 15% uh lingering even after what almost 20 years then I think they’re just like oh wow that’s losing a lot of cumulative growth i mean look at Greece today or Portugal um you kind of get back to having a positive growth rate but you’re not picking up a they’re very different than a normal recession and actually um in a normal recession you go down and then back up the United States had thought it was immune to financial crisis we really hadn’t had one since 1933 and a different book that came out in 2009 i mostly write papers but this was a book with Carmen Reinhardt was called This Time is Different where we had some papers published in advance and we said no they’re different when you have a financial crisis it lasts way longer the slowdown is way worse and we were mocked when we were saying that the I think the New York Times had a two-page spread saying how ridiculous everyone thought you know this was we could have proved wrong and maybe if we’ done things better you know we would have but it is the norm uh it’s there’s a a few exceptions like Sweden got out in a year or two but normally they really are different than a normal recession

Ken Rogoff is the former chief economist of the IMF, a professor of Economics at Harvard, and author of the newly released Our Dollar, Your Problem and This Time is Different.

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