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.

Obama considering $700 billion to $1 trillion stimulus

The Wall Street Journal reports that economic conditions have become so dire that President-elect Barack Obama's economic advisers now think a two-year stimulus of between $700 billion and $1 trillion is needed to jump start the economy:

"President-elect Barack Obama's economic team is considering an economic-stimulus program that will be far larger than the two-year, half-trillion-dollar plan under consideration two weeks ago, according to people familiar with the team's thinking...

With the unemployment rate now expected to hit 9% without aggressive intervention, Obama aides and advisers have set $600 billion over two years as "a very low-end estimate," one person familiar with the matter said. The final number is expected to be significantly higher, possibly between $700 billion and $1 trillion over two years."

The article is linked.

Feingold's statement on Senate's failure to support the auto industry and its workers

Statement of U.S. Senator Russ Feingold On a Minority of Senators Blocking Effort to Save Millions of American Jobs

“I supported this plan to help the U.S. auto industry because without this assistance, millions of American jobs, including tens of thousands in Wisconsin, will be jeopardized. In these tough economic times, allowing our auto manufacturers to fail could be catastrophic for our economy and could send already increasing unemployment levels skyrocketing. I am greatly disappointed that some Senators didn’t hesitate to bail out Wall Street, but decided not to help millions of working class Americans."

Doyle says federal aid needed to avoid tech college and UW cuts

Wisconsin's Governor, Jim Doyle, told the House Appropriations Committee yesterday that unless they pass a stimulus package that includes support for state and local governments he will be forced to cut technical college and state university funding:

"...state budgets ...allow kids to get a good education, and a chance at a good university or technical college education that their families can afford..." Doyle said." So that's what is threatened: our schools, our universities, our technical colleges...These are the areas that determine our budgets...And these cuts could undermine years of careful progress."

Doyle's entire testimony is linked.

Investment in higher ed crucial to affordability and prosperity

Wisconsin received an F for the affordability of higher education in a new study by the National Center for Public Policy and Higher Education.

College education was more affordable in Illinois and Minnesota, two states that have higher per capita incomes and a larger percentage of four- year graduates than Wisconsin.

For several years Wisconsin's political, education and business leadership has made increasing the number of four-year college graduates a public policy goal. But the state has not made the investments necessary to accomplish this goal.

According to a New York Times article on the report: "The rising cost of college — even before the recession — threatens to put higher education out of reach for most Americans..."

The report found that published college tuition and fees increased 439 percent from 1982 to 2007 while median family income rose 147 percent. Student borrowing has more than doubled in the last decade, and students from lower-income families, on average, get smaller grants from the colleges they attend than students from more affluent families.

The increase in costs has been particularly hard for middle class and poor families. Last year, the net cost at a four-year public university amounted to 28 percent of the median family income, while a four-year private university cost 76 percent of the median family income.

Among the poorest families — those with incomes in the lowest 20 percent — the net cost of a year at a public university was 55 percent of median income, up from 39 percent in 1999-2000.

Even at two-year colleges the cost was 49 percent of the poorest families’ median income last year, up from 40 percent in 1999-2000.

The cost of attending Wisconsin's public colleges has risen rapidly because state support has declined precipitously. As recently as 1990, the state provided the Wisconsin Technical System's colleges (WTCS) with about 30% of their funding. That contribution has fallen by 50% to less than 15%. WTCS students, who pay 20% of the costs, now contribute more than the state! And the state contribution to the University of Wisconsin's total operations budget has fallen to below 20%.

As the state's investment in higher education and occupational training has declined, the University of Wisconsin System and the Wisconsin Technical College System (WTCS) have raised tuition and fees, shifting the cost of post-secondary education to students and their families.

The WTCS's adult basic education tuition has increased 54.6% over the last ten years; collegiate transfer tuition by 57.3%. Two-year UW college tuition increased by a whopping 82.6% and UW Madison by 83.8%.

These tuition increases are making higher education less accessible for middle class and low- income students. Recent studies conducted by the University of Wisconsin System concluded that students from lower income families were increasingly under-represented in the state’s public baccalaureate education institutions. Between 1992 and 2002, the percentage of freshmen reporting family incomes in the lowest quintle (less than $30,000) fell by nearly one-fourth, from 14.5% to 11.0%. At the same time, the percentage of freshmen reporting family incomes in the state’s top quintile (greater than $87,000) rose by nearly one-fifth.

The WTCS/UW Committee on Baccalaureate Expansion concluded: "...Wisconsin students from lower income families have less access to a college education than in the U.S. as a whole."

Wisconsin's continued disinvesment in higher education makes a mockery of the goals of increasing the number of four-year college graduates and training a skilled labor force.

If these trends are not reversed, higher education and occupational training, keys to competitive advantage in the global economy, will be increasingly inaccessible for Wisconsin's middle and working class students.

State leaders, faced with a $5.4 billion deficit, need to resist the temptation to reduce Wisconsin's investment in higher education. It is a strategic investment that is essential to Wisconsin's long term growth and the prosperity of its businesses and citizens. It is particularly crucial now as dislocated workers and returning veterans flock to tech colleges.

In these hard times, the state needs to increase its investment in tech colleges and public universities so that when the economy begins to grow again we have the the skilled and technical workforce and the innovative ideas that a growing economy requires.

Odetta-a voice for freedom

Odetta, who gave voice to the civil rights movement as it marched through the deep south in the 1950s and '60s died last night. She also helped Student Non-Violent Coordinating Committee (SNCC) leader Stokley Charmichael and singers Bob Dylan and Joan Baez bring the fight for the civil rights to the Newport Folk Festival in 1963. I was 15 years old and still remember her performance and call to action vividly.

Odetta, born in Alabama, sang at the march on Washington in August 1963. Her song that day was “O Freedom,” dating to slavery days: “O freedom, O freedom, O freedom over me, And before I’d be a slave, I’d be buried in my grave, And go home to my Lord and be free.”

Rosa Parks, who helped start the boycott of segregated buses in Montgomery, Ala., was once asked which songs meant the most to her. She replied, “All of the songs Odetta sings.”

Odetta was 78 years old.

National Bureau of Economic Research declares recession began in December 2007

The U.S. economy entered a recession a year ago this month, the panel that dates American business expansions said today.

The official declaration was made by the cycle-dating committee of the National Bureau of Economic Research, a private, nonprofit group of economists based in Cambridge, Massachusetts. The last time the U.S. was in a recession was from March through November 2001, according to NBER.

“The committee determined that the decline in economic activity in 2008 met the standard for a recession,” the group said in a statement on its Web site. The 1.2 million drop in payroll employment so far this year was the biggest factor in determining that start of the contraction, the group said.

The 73-month economic expansion, lasting from November 2001 to December 2007, was well short of the previous cycle that lasted a record 10 years. At 12 months, the current contraction is already longer than the last slump that covered the eight months from March to November 2001.

Although a recession is conventionally defined as two quarters of successive contraction in gross domestic product, the private committee doesn’t require supporting GDP data to make a recession call. Its members focus on month-to-month changes in the economy.

The U.S. economy shrank at a 0.5 percent pace in the third quarter after expanding 2.8 percent in the previous three months. Economists at Goldman Sachs group Inc. and Morgan Stanley in New York are among those projecting the economy will contract at a 5 percent pace this quarter.
Members of the committee are Stanford University professor Robert Hall; Martin Feldstein of Harvard University; Jeffrey Frankel, also of Harvard University; Northwestern University economics professor Robert Gordon; NBER president James Poterba; David Romer of the University of California at Berkeley; and Conference Board economist Victor Zarnowitz.