Free Markets, Free People

Democrats Seem Poised To Repeat The Mistakes Of Japan

It’s been interesting to watch the left attempt to paint the right as obsessive about tax-cuts, to the exclusion of any other method of stimulating the economy.   Josh Marshall called it “tax cut monomania”.  Of course careful readers who’ve followed this debate know that’s absolute nonsense.  The Republicans have bought into the premise that some level of government spending is necessary, except that it should be tightly targeted and provide immediate stiumlus.

Instead they’re faced with this bloated piece of garbage legislation derisively called the  “2009 Spend Your Grand Children and Great Grand Children into Debt bill”.

I noted Marshall’s appeal to authority (the sacred macroeconomic texts) yesterday and his claim that macroeconomists couldn’t exactly run controlled experiments to prove their point.  But upon reflection, I thought, that’s not precisely true.  While it may not fit the classic definition of a “controlled experiment”, Japan’s 2 decade long struggle to revive its economy is about as close as we’re going to get.

And you know what – the lessons learned from that say we’re about to commit the same mistakes they did.  President Obama claimed, last night, that spending on infrastructure was the way to go – that it would create jobs and stimulate the economy.  But Japan spent $6.3 trillion on construction-related public investment between 1991 and September of last year, and it did nothing of the sort.  Nope, paving over Japan accomplished little in terms of stimulating a down economy.

In the end, say economists, it was not public works but an expensive cleanup of the debt-ridden banking system, combined with growing exports to China and the United States, that brought a close to Japan’s Lost Decade. This has led many to conclude that spending did little more than sink Japan deeply into debt, leaving an enormous tax burden for future generations.

In the United States, it has also led to calls in Congress, particularly by Republicans, not to repeat the errors of Japan’s failed economic stimulus. They argue that it makes more sense to cut taxes, and let people decide how to spend their own money, than for the government to decide how to invest public funds. Japan put more emphasis on increased spending than tax cuts during its slump, but ultimately did reduce consumption taxes to encourage consumer spending as well.

Trade and tax cuts along with spending targeted at banking system was how Japan finally pulled out of its doldrums. We already have 700 billion aimed at our banking system, with only half of it spent. That leaves what, if you’re interested in not repeating the mistakes of an economy which has already gone thorugh this sort of thing?

Well it’s certainly not a huge NRA style spending spreed on public works. Japan spent trillions on public works and infrastructure and it didn’t do what all the economists said it would do. Instead Targeted spending on the banking system, tax cuts and the development of trade turned the tide.

Given the present bill it appears we’re going to “Buy American”, refuse tax cuts and spend hundreds of billions on roads and bridges. The Republicans objections to this mammoth pork and relief fest have nothing to do with “tax cut monomania”. It has much more to do with understanding the lessons learned from the Japanese experience and not wanting to repeat them. Democrats, in their arrogance, seem to believe that they can do the same thing as Japan but have a different outcome.



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6 Responses to Democrats Seem Poised To Repeat The Mistakes Of Japan

  • The heck of it is that, at the time, the consensus among American economists and advisors was that Japan was doing the wrong thing, and that the long term results would be bad.

    They were right then. Where did these economists go? They can’t all be dead in just twenty years.

    Or have they fallen under the magical spell of hopitude and changeiosity? Which looks to last about, oh, two or three more months at a maximum, given the current trajectory.

  • Did you read the whole article? It also says that Tim Geithner, who was there during Japan’s crisis, says 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.”

    • Tim Geithner has nothing to do with, nor has he shaped, what is being debated in Congress right now.  And what is being shaped in Congress is pretty much precisely what Japan did.

      Stimulus, not spending, is the key.  The present bill is long on spending and very short on stimulus.

  • I really don’t like the “it wasn’t tried hard enough” argument. It’s unfalsifiable. I’m really coming around to the idea that if that is your best defense you might as well admit it doesn’t work.

    Even if it “wasn’t tried hard enough”, shouldn’t it have had some visible effect?

  • “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.”

    I would like to know which studies show that. An extreme lib friend of mine said that Defense spending was the best, followed by infrastructure, and then rebates. (I also doubt that tax cuts are so horrible – didn’t Obama’s advisors research it and found them the most effective?)

    Also, Japan made a few other errors like allowing zombie banks to live on (we may have that too) and not printing money. I think we have printed money already if some of those charts are right.