Japanese capitalism can teach U.S. lessons in income growth and equality
U.S. President-elect Joe Biden can learn a lot from Japan.
I say this not because Japan-style capitalism does not have its share of problems, but because the overall result generated by the Japanese economic system is extremely positive. Japan is the global best-in-class for balancing both income growth and income distribution. The result is not just extraordinary socioeconomic stability, but also strong resilience against the temptations of divisive populism — a la Donald Trump.
Creating and sustaining a stable society is one of the fundamental goals of economic policymaking. For this, an economy must both grow and distribute the spoils of wealth creation in a fair and equitable way. So what’s the score? How wealthy are the people and how is that wealth distributed? At the end of last year, the median net financial wealth — all financial assets minus liabilities — for households in Japan stood at $104,000. In the United States, it was $62,000.
Clear-speak: The average Japanese is actually about 40% richer than the average American.
So Japan clearly beats America on the absolute amount of wealth owned by the average household. But what about the distribution? At the bottom end in Japan, approximately 5.5% own less than $10,000 worth of net financial assets. In America, that’s true for 28.4%. There is no denying that Japan does have an underbelly of poor people, but compared to America, relatively few are truly left behind financially.
If at all, it should be a national embarrassment that almost 1 in 3 Americans does not have $10,000 to their name, particularly since the U.S. stock market keeps surging to new historic highs.
In contrast, America does way better than Japan at the top end of the wealth pyramid: 7.1% of Americans own more than $1 million of net financial assets. In Japan, that’s true for only 2.7%. So in percentage terms, America has more than two times more very wealthy people than Japan, but it also has more than five times more poor people.
From an economist’s perspective, America has become disunited and a sociopolitical power keg precisely because of that heavy skew towards the poor and financially left-behind.
Make no mistake — for Joe Biden and his team of policymakers, the real challenge will be how to counter U.S. economic inequality, i.e., how can America become more like Japan?
Here it is important to recall something former British Prime Minister Margaret Thatcher said: Making the rich poorer does not make the poor richer.
Personally, I think this is an excellent guiding principle for any policymaker. The goal must be to create opportunity for success, not to constrain it. Importantly, Japan very much lives up to Thatcher’s principle. How so?
Analyzing household income data, i.e., the annual flow of median after-tax household earnings, reveals the following (I am using the OECD database here, rounded to the nearest thousand): In the past eight years, American median incomes rose by approximately $24,000, from $36,000 to $60,000. Japanese incomes rose from $27,000 to $51,000, i.e., a similar rise of $24,000.
So much for the myth that Japan has been stagnating. True, exports go up and down, and corporate America did very much outperform corporate Japan, but household median incomes grew by basically the same amount in dollar terms.
Our Love-Hate Relationship with Gimmicks
When Jennifer Egan’s novel “A Visit from the Goon Squad” won the Pulitzer Prize, in 2011, much fuss was made over its penultimate chapter, which presents the diary of a twelve-year-old girl in the form of a seventy-six-page PowerPoint presentation. Despite the nearly universal acclaim that the novel had received, critics had trouble deciding whether the PowerPoint was a dazzling, avant-garde innovation or, as one reviewer described it, “a wacky literary gimmick,” a cheap trick that diminished the over-all value of the novel. In an interview with Egan, the novelist Heidi Julavits confessed to dreading the chapter before she read it, and then experiencing a happy relief once she had. “I live in fear of the gimmicky story that fails to rise above its gimmick,” she said. “But within a few pages I totally forgot about the PowerPoint presentation, that’s how ungimmicky your gimmick was.”
The word “gimmick” is believed to come from “gimac,” an anagram of “magic.” The word was likely first used by magicians, gamblers, and swindlers in the nineteen-twenties to refer to the props they wielded to attract, and to misdirect, attention—and sometimes, according to “The Wise-Crack Dictionary,” from 1926, to turn “a fair game crooked.” From such duplicitous beginnings, the idea of gimmickry soon spread. In Vladimir Nabokov’s novel “Invitation to a Beheading,” from 1935, a mother distracts her imprisoned son from counting the hours to his execution by describing the “marvelous gimmicks” of her childhood. The most shocking, she explains, was a trick mirror. When “shapeless, mottled, pockmarked, knobby things” were placed in front of the mirror, it would reflect perfectly sensible forms: flowers, fields, ships, people. When confronted with a human face or hand, the mirror would reflect a jumble of broken images. As the son listens to his mother describe her gimmick, he sees her eyes spark with terror and pity, “as if something real, unquestionable (in this world, where everything was subject to question), had passed through, as if a corner of this horrible life had curled up, and there was a glimpse of the lining.” Behind the mirror lurks something monstrous—an idea of art as device, an object whose representational powers can distort and devalue just as easily as they can estrange and enchant.
Stakeholder vs. Shareholder Capitalism: What Is Ideal Today?
At Morningstar, we’re proud that our research teams not only operate
independently but that our analysts are encouraged to explore ideas and
raise contrarian viewpoints. The enemy of any research organization is
groupthink. A research organization needs to hire people who aren’t
afraid of challenging the status quo and who are always thinking about
how to foster a culture where people feel comfortable speaking up and
encouraging us all to think harder and sharper.
And we debate just about everything. Is the market overvalued? Should private equity be allowed into retirement plans? What categories are most suited to active investors? How much should an annuity cost? And I’d say one of the hottest areas of debate these days is ESG. Does ESG help or hurt investing performance? What ESG risks are truly material to cash flows? What should be included in a “globe rating,” and on and on.
Within the field of sustainable investing and with it evolving so rapidly, there is really no facet that we don’t debate. And today, we’ve asked a group of researchers from across Morningstar to represent opposing sides of a particular ESG argument. But we didn’t have to look far for one that’s taken centerstage in 2020.
HILL: The Great Reset
If you haven’t heard about The Great Reset yet, you will.
Joe Biden’s “Build Back Better” slogan, of which no one knew the meaning or purpose, is a direct lift from The Great Reset Manifesto, let’s call it, concocted by the dreamy-eyed elites of the world who attend annual ritzy, star-studded winter retreats in Davos, Switzerland under the auspices of the World Economic Forum.
“In short” the wealthy elites of the world proclaim to the rest of the world, “we need a ‘Great Reset’ of capitalism.”
To save the world, these elites demand “the world must act … to revamp all aspects of our societies and economies, from education to social contracts and working conditions; …every country… must participate, and every industry, from oil and gas to tech, must be transformed”.
In other words, these elites demand that the entire world embrace socialism; impose much higher wealth taxes, which they will avoid paying, that’s a given; promulgate onerous regulations on banking and industry; and pass massive Green New Deals, which would “only” cost U.S. taxpayers and consumers $93 trillion to implement.
Liberal socialists never say anything about cutting government spending, lowering government regulatory burdens on business and people, getting rid of archaic government programs that have been proven ineffective, or removing legal barriers for people who want to start a business and provide a better life for their family.
Liberal socialists simply believe a lot more government is good. Conservatives don’t. It is pretty much that simple.
Every command issued by Great Reset/One World Government proponents strikes at the core of American individualism. American individualism and self-initiative led to the creation of such ground-breaking innovations as the IPhone, Amazon and Google, nothing close to which has ever been invented under socialist or communist regimes. Wait until the Great Reset dries up American innovation; Millennials and liberals will then see the adverse side of too much governmental control of our economy, then they will be ready for more free market capitalism.
Americans should understandably feel a little queasy when they hear Prince Charles or Canadian PM Justin Trudeau gush about how the COVID pandemic provides the “perfect opportunity” to change everything. Only totalitarians at heart think a pandemic or crisis is “a great time to impose their will on the world.” Hitler took power during the post-WWI economic depression in Germany to “restore the Fatherland,” to name perhaps the worst case in recent history.