Dogs and Demons, by expatriate writer Alex Kerr, is another attempt to explain the malaise into which Japan has fallen over the past decade. Japan’s real-estate and stock-market bubbles have burst with prices falling to one-quarter their previous highs; the Japanese government’s budget deficits dwarf even those run by the United States during the ’80s and early ’90s; and a banking crisis looms over any possible economic recovery. Why?
Kerr places blame for Japan’s troubles on the pervasive and powerful government bureaucracy that creeps into every facet of Japanese life. This unelected administration has had devastating effects on the environment, the culture, and the economy, and threatens to mire the country in a future of unpayable debt.
Japan’s oversized construction industry is at the center of the country’s problems. The sheer scale of this sector is astounding. As a percentage of the GDP, construction investment constitutes 18.2 percent of the Japanese economy compared to less than half that in the United States. By 2000 Japan was spending 9 percent of its GDP and nearly 40 percent of its government budget on public works, levels roughly ten times that of the United States. It has run out of beneficial projects to undertake and proceeds with projects of questionable value. The public-works sector of the economy has “succeeded” in encasing 55 percent of Japan’s coastline in concrete and damming up 97 percent of its rivers. Japan is literally building “the road to nowhere.”
Bureaucratic momentum has kept these massive expenditures in place. While nearly all politicians realize the cost these public works place on the nation as a whole, no local official is willing to give up his slice of pork. Indeed the economies of many rural communities depend almost entirely on government largess.
The book works best as a tale about what government does well and what it does not. The title derives from a quote by the court painter of the emperor of China. When asked what was the hardest thing to paint, he replied “dogs” and when asked the easiest he responded “demons.” In other words, it is harder to manage the commonplace than the exotic. In Kerr’s words, “Basic solutions to modern problems are hard, but pouring money into expensive showpieces is easy.” Japan is a country full of modern concert halls without performers, futuristic sports stadiums without teams, and fantastic art museums without collections. Most important, these monuments are without paying visitors. Public subsidies allow for the creation of these edifices even when the costs far outweigh any potential benefits.
Japan’s difficulties have parallels in the American economy. The U.S. government spent millions creating large-scale low-income housing projects in the ’60s. The Department of Housing and Urban Development was notoriously unsuccessful, however, at creating workable neighborhoods. Similarly, the massive transformation of the American professional sports infrastructure over the past decade has often resulted in beautiful new facilities surrounded by acres of barren parking lots. It is easier to build the shining stadium than that comfortable sports bar on the corner.
The failure of Japan’s economy to revive despite massive capital spending also casts doubt on the ability of Keynesian fiscal policy to revive a stagnant economy. Market-oriented economists have long argued that fiscal stimulus is doomed to failure over any extended period. Since expansionary fiscal policy must be financed by sale of government bonds, this borrowing naturally drains money from private capital markets. Thus government borrowing crowds out private investment. Indeed, while outsiders may gasp at the absurdly low nominal interest rates in Japan (the official interest rate is a minuscule one-tenth of 1 percent), when combined with widespread deflation, real interest rates in Japan are actually quite high.
Sadly, the book itself doesn’t draw such lessons. For a work claiming to discuss the economic collapse of Japan over the past decade, the author displays an extraordinary lack of knowledge about even the most basic economic principles. For example, Kerr confuses nominal and real interest rates, leading him to conclude that the relatively low American savings rate is actually better for accumulating retirement assets than the high savings rates in Japan. Even low nominal interest rates provide a high level of future purchasing power when prices are falling. Furthermore, Kerr generally tries to prove his hypothesis by anecdote and story rather than by hard evidence. While this strategy makes for interesting reading, it does little to persuade a skeptical reader of the validity of his ideas.
For those with a dedicated interest in the rise and fall of modern Japan, this book poses many interesting questions and has numerous fascinating stories to tell. Those looking for convincing answers to those questions, however, will be disappointed.