Sunday, December 14, 2008

The Japanese experience with economic stimulus

In a front page Milwaukee Journal Sentinel Crossroads' column, Amity Shlaes cites the failure of Japan's "huge" fiscal stimulus program in the 1990s as a cautionary tale for President-elect Obama.

Shlaes who has become the darling of free market conservatives for her repudiation of the New Deal and all things Keynesian misrepresents the Japanese experience as a case of large public expenditures in infrastructure that failed to ignite the economy, arguing that infrastructure investments are better left to the private sector.

Leaving aside the obvious problem that a fiscal stimulus is needed precisely because private investment has collapsed, it's apparent that Shlaes is misinformed about Japan's experience. Perhaps she has not read Adam Posner's definitive work, Restoring Japan's Economic Growth, which is a detailed refutation of her arguments.

Japan's 1990s fiscal stimulus, changes in government spending and taxes, was disappointingly modest, not huge, as Shlaes contends. It amounted to only about a third of the announced stimulus and according to Posner: "This limited quantity of total fiscal stimulus was disbursed in insufficiently sized and inefficiently administered doses, with the exception of the 1995 stimulus package."

In 1995 Japan implemented an aggressive fiscal stimulus that led to strong economic growth in 1996. But its impact was undermined in 1996 and 1997 by fiscal contraction. Posner concludes: "On net, the Japanese fiscal stance in the 1990s was barely expansionary...."

The problem in Japan was not a huge stimulus package, as Shlaes contends, but an overly timid one.

This is similar to the U.S. experience in the 1930s. The economy began to grow in 1934 in response to increased deficit spending. But President Franklin Roosevelt, under pressure from his era's balanced budget hawks, was forced to cut federal spending in 1937 and the economy began to contract, only to be rescued by World War II and dramatic increases in federal spending.

So what are the real lessons President-elect Obama and his advisers should learn from Japan and the New Deal? First the stimulus package must be large enough ($700 billion to $1 trillion) to ignite the economy. And second, once the stimulus begins to work and the economy begins to grow, the Obama administration should reject any pressure from the Shlaes' crowd to prematurely cutback on the stimulus.

3 comments:

Patrick J. Devitt said...

Michael,

Good for you! I also read the piece in the Milwaukee Journal Sentinel and found it troubling. I hope that you will send your comments on to the MJS. Hopefully, they will reprint your response.

Dave Reid said...

Here's hoping though that the stimulus will be targeted at fixing long term problems, such as energy independence, and not just road building.

Anonymous said...

Mr. Rosen's cure is pure snake oil, and his take on history far from accurate. First of all, all our Federal Reserve and banking system create money out of nothing. This fiat currency sends the wrong signals to the market place and causes misallocations or malinvestments to occur. Every such boom is followed by a bust. Dot com bubble? Real estate bubble? Auto MFG Bubble? All are because too much money from nothing was invested in these industries.

We used fiat currency to "stimulate" the economy back in 2001. Remember the market crash then? That was the market calling for corrections. Greenspan's response? "We will create the liquidity with which to float the markets." All that really happened is that a badly needed day of reckoning was postponed, and now, a bigger crash resulted. All this is explained by the likes of Ludwig von Mises and his student, F A Hayek.

As to Roosevelt, he continued and expanded many of the programs of Hoover. He and Hoover took what might have been a 2 yr downturn and turned it into a ten or more year disaster. Mr. Obama is poised to recreate the Great Depression, when what is called for is letting the bankrupt go banrkrupt, NOT redistributing the wealth of those who still have some either by taxing their money away, or by making it worth less by way of inflation (that is, creating money out of nothing.) Obama wants to give us more of the medicine which made us sick in the first place. More Inflation, more deficit spending, more misallocation of resources. Inflation, btw, is what undermined our economy, made possible the large salaries of money manipulators like Hank Paulson, who in his last year at the helm of Goldman Sachs made over $600 Million-most of which came because of G_S's ability to "leverage" 2.5 cents into a dollar, driving up stock prices and generating commissions out of thin air.

For a more accurate history of the Depression that what you likely learned in public indoctrination centers, see the work of Murray Rothbard.

Ken Van Doren