Megan McArdle - Megan McArdle is the business and economics editor for The Atlantic. She has worked at three start-ups, a consulting firm, an investment bank, a disaster recovery firm at Ground Zero, and the Economist.
Japan's budget is in a truly terrifying state. Reading about the government's behavior reminds me of the worst accounts of compulsive spenders on the verge of personal bankruptcy--a sort of "What the hell, we're screwed anyway, so let's not think about it and maybe go to Cabo for the weekend." The budget's structural position is what is known technically to economists as "completely hosed"; borrowing now exceeds tax revenue, and debt service costs now eat up almost half of the tax revenue the government collects. "Unsustainable" is too weak to describe the situation; I don't know how they're doing it now.
The situation in Japan is particularly depressing because the country has no major ethnic or political rifts. Sure, there's political jostling, both within and between the parties. But it's nothing compared to the vitriol and mistrust that we see in the US, and somehow I can't imagine Greece-style riots in Japan either. But still the technocrats can't make any headway.
The lesson here, I think, is that it's very, very hard for a government to enact a serious fiscal adjustment unless and until the bond market forces its hand. The Brits are trying, of course -- and we'll see whether or not the coalition government can succeed. But as we saw with George W Bush, the fiscal rectitude of one administration can be more than wiped out during the course of the next.
Even now, with the attention of the world more concentrated on sovereign fiscal issues than ever, the Japanese government can still contrive to raise agricultural subsidies by 40% and send child-care payments soaring, including payments to families who don't need the money. It's even getting rid of highway tolls. Oh, and it's cutting the corporate tax rate.
From a bond-market perspective, this basically just means an ever-greater supply of JGBs: we're still a very long way from any real credit risk, given the political power of the owners of those bonds. But as a lesson in fiscal political economy, Japan is much more worrisome.
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