These talking points are just starting to make the rounds. The right wing version is that Japan did lots of stimulus and it didn't work. Democrats are countering that Japan did not act quickly enough. Is either side right?
I heard this debate on the Randi Rhodes show a few days ago with Steve Forbes. He debated with fill-in host and FBN commentator Nancy Skinner. Nancy said Japan didn't act quickly enough. Forbes countered that they did a lot of stimulus. "Doubled their national debt," he said.
They ended up dropping the argument and switching focus to mark-to-market accounting. So who's right? It's been a while since I read Krugman's The Great Unraveling. This exceptional work should be renamed I Told You So.
"Jan 15, 2002 - Crony Capitalism, U.S.A.
Four years ago, as Asia struggled with an economic crisis, many observers blamed "crony capitalism." Wealthy businessmen in Asia didn't bother to tell investors the truth about their assets, their liabilities or their profits; the aura of invincibility that came from their political connections was enough. Only when a financial crisis came along did people take a hard look at their businesses, which promptly collapsed.
Does this sound familiar?"
So what happened in Japan in the 1990s?
Wikipedia Post War Economy of Japan
From the 1960s to the 1980s, overall real economic growth has been called a "miracle": a 10% average in the 1960s, a 5% average in the 1970s and a 4% average in the 1980s.
Growth slowed markedly in the late 1990s, largely due to the Bank of Japan's failure to cut interest rates quickly enough to counter after-effects of over-investment during the late 1980s. Some economists believe that because the Bank of Japan failed to cut rates quickly enough, Japan entered a liquidity trap. Therefore, to keep its economy afloat, Japan ran massive budget deficits (added trillions in Yen to Japanese financial system) to finance large public works programs. By 1998, Japan's public works projects still could not stimulate demand enough to end the economy's stagnation. In desperation, the Japanese government undertook "structural reform" policies intended to wring speculative excesses from the stock and real estate markets. Unfortunately, these policies led Japan into deflation on numerous occasions between 1999 and 2004.
More from Paul Krugman's prescient book The Great Unraveling.
Aug 16, 2002
Back when I first got professionally obsessed with Japan's problems, around four years ago, I made myself a mental checklist of reasons that Japan's decade of stagnation could not happen to the United States. It went like this:
- The Fed has plenty of room to cut interest rates, which should be enough to deal with any eventuality.
- The U.S. long-term budget position is very strong, so there's plenty of room for fiscal stimulus in the unlikely event interest rates cuts aren't enough.
- We don't have to worry about an Asian-style loss of confidence in our business sector, because we have excellent corporate governance.
- We may have a stock bubble, but we don't have a real estate bubble.
I've now had to strike the first three items from my list, and I'm getting worried about the fourth.
This book got me into politics. At the time I was midway through college and learning about Keynesian economics. It was a real wake up call, that economics can't be discussed without also talking politics. Sadly, I was one of the few that paid attention (after reading this book I was sure Kerry would win). Paul nailed what was happening to our economy five years before it set in.
Now that we're here what can we learn from what happened to Japan?
Earlier this week President Obama discussed what he's learned from the Japanese efforts in stimulus.
We saw this happen in Japan in the 1990s, where they did not act boldly and swiftly enough, and as a consequence they suffered what was called the "lost decade" where essentially for the entire '90s they did not see any significant economic growth.
He and others are convinced that indecision and delay are what caused Japan's Lost Decade. This is probably from Tim Geithner's experience as a financial atache to Japan during the crisis. The NY Times says
One lesson Mr. Geithner has said he took away from that experience is that spending must come in quick, massive doses, and be continued until recovery takes firm root.
Moreover, it matters what gets built: Japan spent too much on increasingly wasteful roads and bridges, and not enough in areas like education and social services, which studies show deliver more bang for the buck than infrastructure spending.
"It is not enough just to hire workers to dig holes and then fill them in again," said Toshihiro Ihori, an economics professor at the University of Tokyo. "One lesson from Japan is that public works get the best results when they create something useful for the future."
I listened to a pretty interesting debate the other night on my drive to the pool. I can't find a transcript, but it was Nancy Skinner and Steve Forbes debating on Air America. I did find this video where Forbes trashes the stimulus plan.
2 minutes and 15 seconds in Steve says...
Well it's just shoveling out money, and it goes back to a faulty theory, allegedly to John Maynard Keynes that if you just get the money out there that will stimulate the economy like putting fuel in a car. But this fuel is watered, it's tainted, to get the money they have to borrow or take it from somewhere else.
And then Steve went on to advocate for payroll tax cuts. It's interesting that he's worried about where the money comes from. This is a concern about inflation (watered down fuel), when the crisis that's at hand is deflation and stagnant growth (stagnation). That's what held Japan down, that's our biggest threat.
In another video he says, "Japan had six or ten of these bills in the 1990s and they didn't work, they didn't increase incentives... In terms of the bill itself it's not gonna get that much money out there that quickly. A lot of the infrastructure projects only 5% go to infrastructure projects like highways"
and then he went on to advocate for tax cuts. That's pretty much what he said when arguing against Ms. Skinner. The right wing really think they have something here.
Why did Japan's Stimulus Fail?
The New York Times article- Japan’s Big-Works Stimulus Is Lesson asks Japanese economists what they think went wrong.
Feb 5, 2009
Between 1991 and 1995, Japan spent some $2.1 trillion on public works, in an economy roughly half as large as that of the United States, according to the Cabinet Office...
Dr. Ihori of the University of Tokyo did a survey of public works in the 1990s, concluding that the spending created almost no additional economic growth. Instead of spreading beneficial ripple effects across the economy, he found that the spending actually led to declines in business investment by driving out private investors. He also said job creation was too narrowly focused in the construction industry in rural areas to give much benefit to the overall economy.
He agreed with other critics that the 1990s stimulus failed because too much of it went to roads and bridges, overbuilding this already heavily developed nation. Critics also said decisions on how to spend the money were made behind closed doors by bureaucrats, politicians and the construction industry, and often reflected political considerations more than economic.
The Japanese spent $2.1T on public works, more than 3 times our total stimulus bill. As we all witnessed last year, bridges to nowhere are politically unpopular, and as Japan proved, economically unsuccessful. It's great that the house is thinking about a Keynesian stimulus that is more than just bridges and roads.
Is our situation like the Japanese in the Lost Decade?
Yes and No. Krugman pointed out the four ways that we are exactly like Japan; no Fed interest rates to cut, housing bubble, poor corporate governance, and a poor long term US budget projections.
The Times article highlights the fact that American roads and bridges have been neglected. Before this stimulus Japan had already invested heavily in their public works.
We also aren't like Japan in terms of land mass. We have three and a quarter million square miles of land in the U.S compared to just 146 thousand sq miles in Japan. The 6.4 million kilometers of roads in the US dwarfs Japan's 1.2m. 226K km of railways versus Japan's 23.4. We don't need to build roads to nowhere, we've got roads and rail to everywhere. They just need upgrades and maintenance.
But, we're not like Japan in a more important way. We know not to spend just to spend. That's why FDR's programs through the CCC and WPA were so diverse. See this list of all the different programs. It was much more than roads and bridges.
That's why the House's bill had so many different spending programs in it. Some might call it sausage, but it was precisely what learning from the Japanese crisis (or FDR's) looks like. Unfortunately the right wing, especially Mr. Forbes have missed that. As noted above Forbes complained that Japan failed, and in the same breath complained that this US stimulus bill has just 5% for highways. Our bill is 1/3rd the size of what Japan put into their public works and just 5% is public works spending. This means our p.w. spending is one and a half percent of what Japan spent on roads and bridges.
How Should our Bill be Crafted?
NY Times - Japan’s Big-Works Stimulus Is Lesson
Japan’s experience also seems to argue for spending heavily to promote social development. A 1998 report by the Japan Institute for Local Government, a nonprofit policy research group, found that every 1 trillion yen, or about $11.2 billion, spent on social services like care for the elderly and monthly pension payments added 1.64 trillion yen in growth. Financing for schools and education delivered an even bigger boost of 1.74 trillion yen, the report found.
But every 1 trillion yen spent on infrastructure projects in the 1990s increased Japan’s gross domestic product, a measure of its overall economic size, by only 1.37 trillion yen, mainly by creating jobs and other improvements like reducing travel times.
All of these still have higher returns than the $1.02 that is generated in economic activity from every $1 in tax cuts.
What Got Cut from the Stimulus?
CNN
Mostly social services, investments in education and science as well as money for an investment in a new green economy and environmental protections. Half the money requested to aid the states was also slashed.
It's clear that Republicans are starting to dig through Japan's Lost Decade and our Great Depression to find economic evidence to back up their political agenda. We need to have this information handy to call out their cherry-picked 'evidence' and de-bunk the spin.