Tokyo Damage Report

how the capitalist – communist thing actually works

Japan! Economy! What the hell, people? The lack of incentives.The redundant workers doing long hours. Companies where 1,200 people do the job that 400 people could do, and the high costs are passed on to the consumer. The banks that pay no interest. Huh? I thought only communist countries do that. 
 
It makes no sense from a capitalist perspective . . .
 
. . . until you realize that the major stock owners of the unprofitable companies are a govt. minister and his pal, the elected official. One needs votes (which require high employment) and the other needs govt. budget money (to subsidize said company which he owns stock / equity in) and the budget money comes from the politician, who decides the budget! So from the point of view of the minister and the politician, all these market in-efficiencies and un-free-market-isms add up to big bucks and good times. And it’s not all bad : the workers get jobs, and the country as a whole is protected from Wall-Street type rape by foreign investors.
 
Here’s the problem: a lot of books talk about the ‘Iron Triangle’ of big business, the politicians, and the bureaucrats. But no one ever explains really how the whole thing works. So I’m going to give it a try.
 
Say a bigtime bureaucrat – never mind which ministry – awards billions every year in government contracts. I’m not going to say he steals the money exactly. But he gets all Dick Cheney with it – giving the government construction contracts only to firms he owns controlling interest in, and those firms charge the government ridiculously high prices. So far, it’s like any country.
 
So now our beuracrat has millions of extra dollars lying around. He’s a crooked motherfucker, but he’s also a patriot! And here’s the Japanese twist: instead of spending it all on bolivian coke and german Mercedes, he spends most of it by investing in Japanese companies, many of which are making things people don’t want, (that is to say, making things that foreigners make better and cheaper (but the foreign imports have such high tariffs that the Japanese locals pretty much have to buy the native products) and making them in the least efficient possible way: having 200 workers working 12-hours shifts when 100 workers would do, etc.
 
Naturally, if the companies would go bankrupt, the bureaucrat would lose his own money. (well, technically it’s the taxpayers’ money that he stole, but anyways). So he has to save the companies. By getting them government subsidies! And by persuading the Japanese banks to loan them infinity money.
 
But he’s just a bureaucrat. His budget for subsidies has to be approved by an elected official. Fortunately, the politician ALSO owns a lot of stock in those companies, and HE doesn’t want them to go belly-up either. More importantly: the politician won’t get re-elected if unemployment rises.
 
Yeah, this is Japan, the land of fake statistics and no-transparency. The pol COULD fake the unemployment stats on paper, but he knows the real unemployed people would realize “Hey! I’m unemployed!” and vote for the other guy come election day. So he has to keep unemployment down by propping up these unprofitable businesses. Thus: he appropriates budget money the bureaucrat’s ministry, and the bureaucrat gives the money to the companies in the form of subsidies.
 
But the subsidies are not enough! Fuck! Enter the third piece of the puzzle : the banker. Who ALSO happens to own a large hunk of this stupid company.  For a piece of crap, it’s a popular company.
 
Not only that, but both the politician and the bureaucrat are on the board of directors of his bank. And the banker’s on the board of directors of the company. So he has an incentive to never ask for the loans back. Normally in capitalism a bank who never gets loans back ALSO goes out of business. But this is not capitalism! In Japan, the politician and bureaucrat (who are also profiting from this arrangement, and also own part of the bank to begin with, let’s not forget) simply agree that the government will prop up the bank. And since foreigners are not allowed to own any part of the bank, nor do foreigners put millions of their money IN the bank, there is no risk of actual capitalists saying “This bank is bankrupt, it needs reform!” or “This bank needs to be shut down!”
 
And, in a vicious circle: the company is getting all this free money, so why should they improve their customer service, or efficiency, or make products that people want, or change anything ever?
 
And since the company has no incentive to change, but the owners (bank, politician, bureaucrat) DO have an incentive to make the company profitable, the owners just keep funneling this money into the company, say $3,000,000 . . .  just so they can make  a measly $500,000 profit for themselves when people buy the finished (too expensive and not very good) products. Honestly, wouldn’t it cost LESS tax money if they just embezzled the $500,000 directly?
 
Answer : yes! But! That would be unpatriotic, to just steal.
 
It’s not all corruption, is what I’m saying: the average Japanese has a job! Even if they are just a grandpa who waves traffic around a pylon, or a young guy who encases entire mountains in concrete to “prevent erosion”, or a lady in a funny hat who operates your elevator for you.
 
In a real capitalist country, they’d all be fired . . . and even people who were NOT redundant would ALSO be fired because a Bangladesh kid could do their job cheaper. We have to be competitive in a global market! Proactive! New paradigm! Security will escort you to your car!
 
So, I get why Japan’s leaders don’t want to try things the Western way.
 
I GET why Japan doesn’t change the iron triangle arrangement – because all the top people profit from it and the bottom people get jobs and subsidies.
 
 
But – despite reading DOGS AND DEMONS like ten times – I still don’t understand why there isn’t a third option: take these unprofitable companies and have them make things that Japanese people actually want?
 
OK, I say!  keep your corruption and your non-transparency and your trade barriers and all the rest!  But why can’t the iron triangle get its iron shit together and make companies profitable WITHIN that arrangement . . .in the end all the top people would profit even more. And THAT is what puzzles me.
 
Why doesn’t any iron triangle guy say, “Hey, what if we took these 100 redundant motherfuckers and had them subtitle anime into English? Those English motherfuckers will buy anything anime! What if we took the 100 extra guys from this company and had them fuck the 100 extra guys from THAT company, and pay 100 guys from the third company to film it? You know Australians would pay billions for that DVD.” 
 
Think of your own examples in the comments. Word.
11 comments Tags:

11 Comments so far

  1. François February 28th, 2011 9:40 pm

    There's probably a line to be added on the Amakudari system: bureaucrats are not directly on the board of administration of those crappy companies (mostly construction-related), but they know that if they give it good contracts (well, crappy contracts from anybody else's point of view), they'll land a confy job when they retire.

    And so it goes: the company doesn't implement new policies to do interesting/efficient/useful services and products, because that requires actual work, and we have to remember that the guy on top is only here to sleep / play golf with the officials / look important while earning the big bucks.
    His carreer days are over, this is his free time after decades of stupidly long hours of desk-slaving at the ministry. And fuck you if you don't agree, cause you're a young brat that don't know jack shit and should respect the elders.

  2. rashomon March 1st, 2011 9:09 am

     “Inside the Kaisha”, a book about how Japanese organizations work and make decisions, offers a pretty good explanation of why there isn’t a third way. One of the book’s points is that organizations emphasize avoiding embarrassment and following the proper process rather than maximizing profits or results. It is better to follow the proper process and fail than to break with the routine (causing embarrassment for others) and succeed.  An example in the book talks about an employee at a bank being criticized for trading in a new way and getting extra profits which made the budget and forecasting guys look bad. The employee basically had to stop trading for awhile so that he could “meet budget”. (Another tidbit, related to not being embarrassed, in the book is many companies are more concerned with maintaining their market share/status than profits.)  Who is going to gain from a third way with greater “profits” in that sort of system?  If you are a top guy, your pay and promotions aren’t tied to profits and to achieve higher profits you may need to do things that embarrass people that you might need support from in the future. Anyway, I thought the book offered a better explanation than the normal clichés that focus on confusion values and other BS.

  3. admin March 1st, 2011 11:51 am

    @rashomon: rad! thanks for the excellent examples. I’ll put that book on my list for sure. Definitely you make a good point about profits being not the top priority compared to harmony and the all-important kata. I got a post coming up about kata as it relates to my capitalist-communist obsession. meanwhile, rock on.

  4. Treats March 2nd, 2011 1:54 am

    The name for this system is state capitalism. See also: third way economics.

  5. J March 3rd, 2011 12:25 am

    What I find upsetting about it is the stifling lack of creativity that this all breeds. It's not just a trader that has to stop trading to bring his budget back down – it's R&D departments where the R stands for Rest and the D for Dormancy.
    You cant create something new and innovative because it will screw up the crappy projections and it will make your competing megacorp look bad that you took a new, exciting thing to market before them.
    The result? A million identical (ly shitty) keitai where the greatest innovation a new model would have is new set of animated emoticons and every smart phone on the market imported from Korea or Taiwan. There'll be Japanese made smart phones soon enough now, and in many ways they'll be better (because 1000 guys will pay an anal attention to procedural detail in their manufacture) but they wont be smarter…. apart from more emoticons or other old bolted-on keitai 'features'. The same thing can be seen with almost any given Japanese product.
    As a foreigner working in this quagmire, I have two main jobs. 1) Push people to do useful work (in amongst the pointless crap). 2) Accept the blame for doing so, apologising profusely and pretending that it's all because I don't understand Japanese working culture ,but please bear with a poor misguided gaijin and do what I asked you to do at step 1 anyway. 
    I doubt I'm alone in this.
    All the big trading companies will have a department or two entirely populated by foreigners and basically independent. I suspect that this is not to ease communications with other native English speaking traders across the world, it's to have a department that'll make enough money to support the rest of the edifice.
    So I'd take 100 guys, give them a room full of Lego Mindworks, 3D printers, drawing boards and CAD tools and stuff and tell them to play at inventing stuff. It'll cost no more money than wasting their time filling out pointless procedural spreadsheets* and it just might cause the side effect of something valuable actually being invented. 
    Japanese companies are full of amazing and creative people who gradually turning into more faceless, gray salary men as their innovation and joy is sucked out of them into the iron triangle's void. It is such a waste, it genuinely sometimes makes me want to cry. 
    —-
    * Oh God! The fucking spreadsheets! A spreadsheet is a way to arrange procedures on a page so that any possibility of individual responsibility, creativity, free thinking or fun can be systematically expunged from any task whatsoever. To my knowledge, they are never ever used to analyse data, increase understanding or otherwise do anything useful.

  6. funniously March 3rd, 2011 12:56 am

    The big question with the Japanese model is, "What happens when the tax base used to fund it starts shrinking because of a rapidly aging society"?   That is what Japan is facing now.  Its debt-to-GDP ratio is at over 200% (astronomical by global standards).  If that debt were owned by outside creditors, Japan would already have been in default like Greece.  The fact that it is held almost entirely by Japanese creditors has allowed the system to continue to function longer than it otherwise would have, but eventually those government bonds will have to be paid out or the government will be in default.  Meanwhile, the number of taxpayers funding the whole ponzi scheme continues to shrink, meaning eventually some of those fat cats sitting at the top (or those waiting in the wings to succeed them) are in for a rude awakening when daddy cuts off the allowance and major government cuts are made.  If Japan sticks to the current system, even more waste will occur because the people caught up in the system will spend an inordinate amount of time trying to "pick the winning the horses" out of the system and hitch a ride with them, rather than engaged in genuinely productive activities.  How to solve this conundrum?  Increase the tax base by immigration (or more robots)?  Raise taxes?  Cut spending?  Few authorities seem willing to make the hard choices or spell it out for the Japanese public in a transparent manner, unfortunately (although on this point I could be wrong – taking an accurate pulse of the Japanese zeitgeist is never easy). 

  7. admin March 3rd, 2011 5:01 am

    @ funniously and J: thanks for your detailed comments!
    I’m really curious what you think of this:
    http://www.theatlantic.com/international/archive/2011/02/the-myth-of-japans-lost-decades/71741/

    This fella, Fingleton, a business journalist who lives here, writes:
    Question 1: Given that Japan’s current account surplus (the widest and most meaningful measure of its trade) totaled $36 billion in 1990, what was it in 2010: (a) $18 billion; (b) $41 billion; or (c) $194 billion?

    Question 2: How has the yen fared on balance against the dollar in the 20 years up to 2010: (a) fallen 11 percent; (b) risen 24 percent; (c) risen 65 percent?

    The answer in each case is (c). Yes, all talk about “stagnation” and “malaise” to the contrary, Japan’s surplus is up more than five-fold since 1990. And, yes, far from falling against the dollar, the Japanese yen has actually boasted the strongest rise of any major currency in the last two decades.

    (end quote)

    given that i don’t know what “account surplus” means, i can’t say if dude is right or wrong.

    Can you have a rad “account surplus” but still a shitty “debt-to-GDP” ratio?

    Whose accounts is Fingleton talking about, anyway? the government? the businesses, all added together? The people’s bank accounts?

    Can you guys help me out on this?

    I really don’t like it when I can’t choose the level of jargon. Like if i want to read about financial goings-on, i either have to first get an MBA, or I can watch some Youtube of some tea party guy blaming everything on the jews and their reptile-humanoid masters, but I can’t choose “informed financial commentary directed at people who are not millionaires or businessmen” as an option, even in today’s information-rich internet planet. Fuck!

  8. Alex March 3rd, 2011 8:48 am

    A current account surplus isn't directly related to debt/GDP, so yeah, one can be rad while the other is shitty.  The "account" is doesn't refer specifically to X, Y, or Z entity which makes it sort of a misnomer if you didn't take econ.  It's rather just the sum of 3 broad components for the country: 
    – trade deficit/surplus (so this would be on behalf of all the entities in Japan, namely corporations, exporting/importing; Japan has a surplus here because they import relatively little)
    – "net factor income;" this is basically investment income made from investments abroad (but not the value of those investments) — kinda like your investment income you have to report on your tax return from capital gains in the US — PLUS any remittances made to Japan.  This is generally going to be small compared to the trade balance figure, from what I recall.
    – net transfer payments; usually this means foreign aid.
    The trade surplus (or deficit) is likely to make up the largest part of the current account balance, and since Japan is so export-heavy (and has continued to be so for what… the last 60+ years?), it has a rad/growing current account surplus.
    Debt/GDP on the other hand is just government debt (or total debt) divided by GDP; from what funniously wrote above (as well as my assumptions based on personal observation, cash culture, historical/cultural "weight" of debts, etc.) I think this would be basically government debt in Japan's case.  Governments can issue tons of debt pretty much whenever they like (in the form of bonds, like the ever popular US Treasury Bill); the thing they have to watch out for is making sure they can keep ahead of the interest payments.  Honestly I don't know how much the "principal" really factors in; funniously pointed out that yeah, eventually the bonds have to be paid back, but if the government needs more money to pay them, why not just issue a new round of bonds?  My sense is that the nature of this "iron triangle" system and the general insularity of the Japanese capital system creates leeway/pitfalls/both that allow Japan to run with a high debt/GDP ratio, but I don't really know enough about it to guess at what those might be.

  9. rashomon March 3rd, 2011 9:11 am

    Let me take a shot at this, I’ve got a MBA. The current account is all exports (goods, services, cash coming in) minus imports (goods, services, cash going out) and it is just a way to measure the flow of trade between a nation and the rest of the world or other nations.  A positive account balance, in simple terms, means more money is coming in from overseas than is going out of the nation.  Japan can have such a high debt to GDP ratio because the majority of its debt is internal.  Unlike the United States which owes China and Japan a lot of money, the Japanese government owes Japanese people and companies a lot of money. So the Japanese government borrows money from the Japanese people at very low interest rates and uses it to support Japanese businesses which then employ Japanese people who can save their salaries and loan it to the government. Of course, the government will pay the Japanese people back with taxes from the Japanese people (and maybe some corporate taxes). This is the exact sort of thing that makes talking about Japanese economics nearly impossible to do without eventually using terms like circle jerk.
    I think that the Myth of the Lost Decade article has some good points in it. I think the author misses an important indicator of a lost decade and that is the number of underemployed Japanese people. Un employment is still low (4.9%,  that is 1990s US boom time levels) but the number of Japanese in temp positions or non career positions is now a lot higher than in the past. The same thing can be said about the US but in both countries I think it is an indicator of structural problems in their economies.
    It’s too bad that Matt Taibbi doesn’t cover international stories; he does a pretty good job of cutting through jargon and BS for the US.

  10. funniously March 3rd, 2011 9:00 pm

    Alex and rashomon have it right on in describing what the current account surplus/deficit is. My first comment failed to point out this important factor (sorry), and so it came across as overly pessimistic in retrospect. 
    Basically, Japan's (a) surplus in the current account, plus it's (b) massive foreign exchange reserves (holdings of foreign currency like US T-bills and dollars), and, perhaps most importantly,  (c) it's absence of foreign owned debt, are what are keeping the system running and still in the black.  This is why the government (a) freaks out whenever exports start dropping, (b) has no fear of a "run" on the Japanese yen because it has enough foreign cash to buy yen up and drive the value up again , and (c) has no fear of skittish foriegn investors calling in loans and demanding their pound of flesh via IMF-style bailouts and restructuring.  Of each of these factors, a current account deficit situation would be the most likely trigger for a crisis in Japan.  Whether this is likely to happen is unknown, but it depends mainly of the health of the US and, increasingly, Chinese economies – Japan's two main export markets. 
    However, given Japan's shrinking population and tax base and the shrinking size of the Japanese economy itself, its GDP (or if you will, the denominator in the debt-to-GDP ratio) is going down.  Meanwhile the debt continues to rise, both in actual sum and in per person terms.  This can't go on indefinitely, so some measures to either increase the tax base or reduce spending will eventually have to be taken.
    (Note: it's true that the government can issue debt indefinitely and, because of the closed nature of the Japanese financial system, a future "default" would likewise only be an internal phenomenon – the cost of which would take the form of inflation, which may not necessarily be a bad thing since right now Japan is in a state of deflation.)
    So basically Japan is not in such a bad position while the global economy is in good shape, but no one really knows what will happen to the global economy in the future, nor whether and how Japan will address its looming financial decisions.  Luckily for Japan, it got rich BEFORE it got old (unlike China and its one-child policy), but certainly a crisis here would ripple globally and so it is distressing to see country drifting along without setting a clear course.  A lot of uncertainty and hardship, especially for young people, could be relieved if someone would just make a decision already and take responsibility for the country's future.

  11. disgracedminister March 4th, 2011 9:39 pm

    http://en.wikipedia.org/wiki/Balance_of_payments
    This is the real deal. The current account can be in surplus but the capital account would be in deficit. In Ireland here, now facing into a "lost decade", it's a huge export led current account recovery but the capital account would be in deficit. Actually you're really screwed if both are in deficit, somebody's not checking the books.

    Japan doesn't attract a lot of investment from outside the country so its captial account would be in deficit and so it finances this problem through domestic capital investment. It does have to worry about inflation and other issues. (this always confuses me). Usually it will alter an aspect of its monetary policy to avoid inflation, or deflation. Lower interest rates encourage spending, high interest rates discourage etc.

    Since Japan has a lot of cash from exports lying around it runs the risk of inflation but the economy has been gripped by debt and so much of the current account surplus is spent on safe investments, bonds and foreign reserve to back up the debt. in the "global economy" Japan would use its surplus to invest in other countries who buy their products. These foreign owned assets record a capital increase in the economy of the country being invested in. The USA for instance has a current account deficit but a capital account surplus. Not selling much but the investment money in infrastructure and companies flows in.

    The debt to service ratio only comes into play when a country really overstretches its deficit, either capital or current account. Like Ireland right now, or Iceland before it. Their deficit couldn't be balanced with investment in the economy and so began a fiscal crisis. Japan has foreign currency reserves to keep the value of its currency stable, and in turn finance the debt of countries which buy its products.

    Lastly you should look up the policy trilemma, or the impossible trinity. Governments have three monetary options: capital controls, fixed exchange rate and control over interest rates. (http://en.wikipedia.org /wiki/Impossible_trinity) You can only ever achieve two at one time.
    This world crisis should spill into Japan at some point, just a matter of time. I'd be more worried about an earthquake or a Chinese asset bubble, even an Australian one. Still, Ireland is doing the opposite to Japan, not employing people at all, and this is throwing people off the island at emigration levels not seen since the 1950s. The economists are wrong, the way countries are financing themselves is futile as it inevitably leads to asset bubbles, trade conflicts and debt problems.
     

     

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