Prime Minister Shinzo Abe of Japan has announced plans to request that Japan’s corporate leaders increase salaries and wages at an upcoming meeting of government, business, and nonprofit leaders in preparation for the spring labor negotiation period, or shunto. That would be the fourth straight year that Mr. Abe has proposed higher wages to strengthen Japan’s beleaguered economy.
The idea that higher wages can lead to economic recovery has become a core principle of what has come to be called Abenomics. But does the idea pave the road to another great depression?
The two main principles of Abenomics are a very loose monetary policy and a stimulative fiscal policy involving large government budget deficits. Japan has also raised its consumption tax. This policy agenda has been in place since the Tokyo stock market bubble broke in 1989.
Not surprisingly, this policy approach has failed to fix the problems in the Japanese economy. The policy probably looks familiar because it is also the standing policy in the US and most eurozone nations. It should also be familiar because it is really nothing new, but simply old-fashioned Keynesian economics with a new label.
This approach has resulted in the once vaunted Japanese economy of the 1980s becoming the world’s worst debtor nation. Its ratio of national government debt to the size of its economy, or GDP, is now close to 250 percent. Most countries that approach or exceed a ratio of 100 percent are considered to be economic basket cases. The last calculation for the US was 104 percent and growing.
Let us take a closer look at this idea of politically motivated increases in salaries and wages.
How would politically driven increases in salaries and wages lead to economic recovery? This notion has its foundation built on the observation that in growing economies workers generally experience higher wages, or at least increases in the purchasing power of their wages. Therefore, the idea is that higher wages will lead to economic growth.