What can we learn from Japan?

by Russ Roberts on February 6, 2009

in Stimulus

Nice piece (albeit slightly schizophrenic) in the New York Times (HT: Tyler) on Japan's attempt to spend its way to recovery. Here are few highlights:

Japan’s rural areas have been paved over and filled in with roads, dams
and other big infrastructure projects, the legacy of trillions of
dollars spent to lift the economy from a severe downturn caused by the
bursting of a real estate bubble in the late 1980s. During those nearly
two decades, Japan accumulated the largest public debt in the developed
world — totaling 180 percent of its $5.5 trillion economy — while
failing to generate a convincing recovery.

Note the last sentence. Somehow, two paragraphs later:

In a nutshell, Japan’s experience suggests that infrastructure
spending, while a blunt instrument, can help revive a developed
economy, say many economists and one very important American official:
Treasury Secretary Timothy F. Geithner,
who was a young financial attaché in Japan during the collapse and
subsequent doldrums. 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.

And yet:

In total, Japan spent $6.3 trillion on construction-related public
investment between 1991 and September of last year, according to the
Cabinet Office. The spending peaked in 1995 and remained high until the
early 2000s, when it was cut amid growing concerns about ballooning
budget deficits. More recently, the governing Liberal Democratic Party
has increased spending again to revive the economy and the party’s own
flagging popularity.

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.

And this:

Economists tend to divide into two camps on the question of Japan’s
infrastructure spending: those, many of them Americans like Mr.
Geithner, who think it did not go far enough; and those, many of them
Japanese, who think it was a colossal waste.

Among ordinary
Japanese, the spending is widely disparaged for having turned the
nation into a public-works-based welfare state and making regional
economies dependent on Tokyo for jobs.

Later on, we get some classic ex-post theorizing:

…proponents of Keynesian-style stimulus spending in the United States
say that Japan’s approach failed to accomplish more not because of
waste but because it was never tried wholeheartedly. They argue that
instead of making one big push to pump up the economy with economic
shock therapy, Japan spread its spending out over several years,
diluting the effects.After years of heavy spending in the first
half of the 1990s, economists say, Japan’s leaders grew concerned about
growing budget deficits and cut back too soon, snuffing out the
recovery in its infancy, much as Roosevelt did to the American economy
in 1936.

But let's hear from the Japanese side:

Most Japanese economists have tended to take a bleaker view of their
nation’s track record, saying that Japan spent more than enough money,
but wasted too much of it on roads to nowhere and other unneeded
projects.

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.

Part of the problem:

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.

Good thing that won't happen here.

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{ 35 comments }

ChrisF February 6, 2009 at 10:59 am

The Keynesian line — "It would have worked if they had just spent MORE" is a one-way ratchet to disaster if Keynes was wrong, and a one-way ticket to a lot of long-term debt if he was right.

Those who do not learn from history are doomed to repeat it.

Greg Ransom February 6, 2009 at 11:46 am

I can remember when Donald Davidson and other Keynesian economists were telling me that the 1995 Kyoto/Kobe earthquake would help pull Japan out of its slump . . .

And no, that is not a joke.

Sam Grove February 6, 2009 at 11:47 am

19th century doctor: "The bleeding hasn't worked. The patient is still failing"

Keynesian: "You haven't bled the patient enough or fast enough. We have to get the bad spirits out of the patient."

Martin Brock February 6, 2009 at 12:09 pm

Population aging is most acute in Japan. The Japanese labor force peaked in 1998 and is now declining, as the population of older Japanese not in the labor force continues growing. This demographic transition isn't supposed to make any difference. The economy is supposed to produce more output every year regardless, because it's not about economic fundamentals like the size of the labor force. It's only about politics and finance.

Plac Ebo February 6, 2009 at 12:21 pm

In a democracy how do you wean all the recipients of this "stimulus" spending? I think of the many agricultural subsidies that no one can convincingly argue are needed, and yet they continue. I see the same thing happening with the stimulus spending. Once a program begins it is almost impossible to eliminate. I'm a long way from buying into the libertarian philosophy. My angle is that I hate needless waste. And the stimulus plan is loaded with needless waste that we'll be saddled with for decades.

BoscoH February 6, 2009 at 12:40 pm

@Plac Ebo, You're 90% of the way to getting your libertarian union card. The other 10% is developing healthy contempt for anyone of any party who attains public office. To really tell if you've become a libertarian, you'll need to do some introspection. The podcasts with Mike Munger can help. A professor at Duke, he is also the new perennial great hope for the Libertarian Party. If you love him in the podcasts and know you would detest him if he manages to get himself elected, then you get your union card.

djd February 6, 2009 at 12:43 pm

Now this guy is a true Keynesian: http://www.latimes.com/news/local/la-me-briefs4-2009feb04,0,2705277.story

Times were so tough for window repairman Timothy Carl Klenke, police say, that he decided to take proactive measures: He armed himself with a slingshot and began cruising around the city, shattering at least five windows and car windshields as he went."

The statements he gave to officers led them to believe he was out to drum up business and was prepared to go out and do some more damage," Redlands police spokesman Carl Baker said Tuesday….

Baker said Klenke, who was arrested Monday, had planned to contact the victims later and offer to repair the windows for a fee.

"I'm sure it has something to do with the economy," Baker said. "Everybody is hurting now."

alex February 6, 2009 at 1:01 pm

The more I read from Cowen, the more confused I think he is. I don't doubt the man's intelligence or honesty, I just don't think he knows what he thinks.

Plac Ebo February 6, 2009 at 1:11 pm

@Plac Ebo, You're 90% of the way to getting your libertarian union card.

BoscoH, thanks for the warning. I'm going to re-read my Upton Sinclair collection so that I can get back to 50%.

Methinks February 6, 2009 at 1:36 pm

Sam, you hit the nail on the head, as usual. Any government spending failure is due to not spending enough. Mmmm'kay.

russ wood February 6, 2009 at 1:43 pm

If only a young Tim Gheitner had been trained in Ireland instead of Japan…

The proof that Keynesian's control the debateis that the Irish plan of cutting spending and taxes was deemed The Irish Miracle when it worked. Most of us would have called it obvious.

Today, Ireland is cutting speding again.

Oil Shock February 6, 2009 at 3:19 pm

A patient comes to a hospital bleeding heavily in his right arm and right leg. Dr. Keynes, the surgeon on duty, immediately thrusted a big needle connected to a tube on to the patient's left arm and leg, drawing blood. He then tries to inject it into the right arm to compensate for the loss of blood. Patient dies! Dr. Keynes said afterwards that the patient didn't let him draw blood quickly enough to kick start his recovery.

Oil Shock February 6, 2009 at 3:36 pm

Dr. Keynes went on to say that the patient left limbs were taking up an unfair share of the blood. Blood was "idle" on the patient's left side.

muirgeomuirgeo February 6, 2009 at 4:09 pm

A patient comes to a hospital bleeding heavily in his right arm and right leg. Dr. Keynes, the surgeon on duty, immediately thrusted a big needle connected to a tube on to the patient's left arm and leg, (drawing blood) NO NO NO… he puts in donated blood. The patient shock goes from uncompensated to compensated shock to recovery and his own normal homeostatic mechanisms take over and he does fine.

The guy who donated blood? He's doing fine.

Posted by: Oil Shock

Now same patient comes in to see Dr. Hayek who states… oh it's merely a flesh wound you have plenty of blood to recuperate, does nothing and the patient bleeds out and dies.

RickC February 6, 2009 at 4:22 pm

Martin Brock,

Isn't this very same belief true for almost all of Europe? And doesn't Japan allow very little immigration? I'm wondering how much more intense the problem will be in Europe because of the massive influx of immigrants, most of whom, as I understand it, are immediately added to the welfare rolls while only a relatively few enter the work force.

Plac Ebo,

I read an article the other day which noted that many years after Sinclair published "The Jungle," he was a little ambivalent about the effects he had helped bring about. You see, the new regulations were written in large part by the big guys and then used to drive the small competitors out of business. Sound familiar?

Methinks February 6, 2009 at 4:25 pm

Now same patient comes in to see Dr. Hayek who states… oh it's merely a flesh wound you have plenty of blood to recuperate, does nothing and the patient bleeds out and dies. – Muirdiot

Thank GOD I know who you are so I can warn anyone living within a 50 mile radius to keep their children away from you!

Oil Shock February 6, 2009 at 4:26 pm

he puts in donated blood

If the patient is the whole U.S economy, where from is the Big Brother confiscating the blood from? If it is the whole global economy, where is the blood getting confiscated from?

Dr. Hayek

Doctor Hayek would tell the patient that you need 6 months to recuperate.He will also advise that the old habits of Skiing, Sky diving, tight rope walking will have to wait until he completely recovers.

Muirgeo, I know you are conveniently avoiding any explanation of the equation you posted earlier. You avoided answering as to what specific fiscal policies got us out of the sharpest depression ( one of the shortest ever too ) in our recorded history ( 1921 ). Or try explain all the recessions of the 19th century.

spencer February 6, 2009 at 4:42 pm

One point in the article that the US economics profession manages to studiously avoid is that the alternative scenario to Japans stagnation decade might have been a 1930s type depression.

You seem to just assume that the bank bailouts and government deficits prevented a boom while there is extremely strong evidence that it actually prevented a depression.

Japan's lost decade was the bullish scenario, not the bearish scenario.

RickC February 6, 2009 at 5:03 pm

Spencer,

You say there is strong evidence. Let's see it please.

Mezzanine February 6, 2009 at 5:46 pm

If $2 trillion doesn't do the job, then double it. If not then, double down again until you've drained the nation's wealth dry. The answer at the end of that tunnel is North Korea, which I think muirducks would find quite unpleasant.

muirgeomuirgeo February 6, 2009 at 5:47 pm

Thank GOD I know who you are so I can warn anyone living within a 50 mile radius to keep their children away from you!

Posted by: Methinks

Hey we all know what I do for a living. How about you tell us how you are contibuting to society. That or quiet about what I do because some one like yourself has no clue of what I do.

vikingvista February 6, 2009 at 6:03 pm

With any bad result, one side can just as easily claim it could've been worse as the other side can claim it could've been better. The claim by itself is therefore worthless without debatable principles, reasoning, or evidence to defend it.

Methinks February 6, 2009 at 6:55 pm

Hey we all know what I do for a living. How about you tell us how you are contibuting to society.

You think you "contribute to society"? I had no idea you're a comedian.

…because some one like yourself has no clue of what I do.

The problem is that YOU have no clue what you're doing.

You also have no clue what anyone else does for a living but it doesn't stop your enormous river of diarrhea of idiotic, poorly written but authoritative commentary.

Methinks February 6, 2009 at 7:00 pm

Viking,

Arguments requiring counterfactual history are pretty difficult to defend. One defense of the New Deal is that it prevented the United States from communist revolution because communism was relatively popular during that time. That argument ignores the political and economic system in place at the time in the United States and the lack of popularity of communism in communist countries, among other things.

Mr. Econotarian February 6, 2009 at 8:14 pm

"One point in the article that the US economics profession manages to studiously avoid is that the alternative scenario to Japans stagnation decade might have been a 1930s type depression."

The point that should be remembered is that the 1930's depression was mainly a monetary problem, the Fed explicitly contracting the money from 1929-1933 supply to "fight speculation". There also was the problem of leaving the gold standard to devalue the dollar, made difficult because of contracts with "pay in gold" clauses, but FDR decided to just make them illegal, which solved the problem and allowed him to begin expanding the money supply in 1933.

Japan also tried to fight the beginning of the lost decade with tight money policies, raising interest rates. This probably made things worse. Then Japan realized what was going on, and dropped interest rates to near zero, but the banking sector remained messed up until around 2001 when it was finally cleaned up. And, oh yeah, they threw away a lot of tax dollars doing silly stimulus.

However the extent of the bad monetary policy at the beginning of the Lost Decade was not as bad as what the US Fed did from 1929-1933. Plus Japan wasn't going to go communist, whereas many business owners in the US were not sure about that until WWII started, which probably reduced investment.

dg lesvic February 6, 2009 at 11:16 pm

Martin Brock,

Please check the last posting at Is Keynesian Economics Really Economics?

Gil February 7, 2009 at 1:14 am

Tell us why the whopping 1987 stock market crash not send trigger the Great Depression v2.0 O. Shock?

vidyohs February 7, 2009 at 5:11 pm

Plac Ebo,

LOL, could you tell us what needful waste is? And, do you love needful waste as much as you hate needless waste?

"My angle is that I hate needless waste. And the stimulus plan is loaded with needless waste that we'll be saddled with for decades.
Posted by: Plac Ebo | Feb 6, 2009 12:21:46 PM"

Maybe what I am missing in this vast debate between looney left and righteous right is that there is such a thing as needful waste.

I'll make a mission of looking into that.

vidyohs February 7, 2009 at 9:06 pm

muirduckmuirduck,

Does the double name indicate that we get double the babble?

However:

"Hey we all know what I do for a living. How about you tell us how you are contibuting to society. That or quiet about what I do because some one like yourself has no clue of what I do.
Posted by: muirgeomuirgeo | Feb 6, 2009 5:47:18 PM"

Tis true that we have no clue what you do. However, your consistent idiocy in expression of ideology here can only lead us to suspect that a man with a broken brain is probably not some one to trust in any capacity.

That being said, you asked what Methinks is contributing to society, why my little duckling, she is adhereing to the priciple Ayn Rand exspressed when asked what to do about the poor. "Don't be one".

There you go, Methinks is not one.

See how simple this shit is?

As a matter of fact Methinks, by participating on this blog, is carrying Ayn's instruction to its next logical step, she is teaching others how not to be poor.

I suspect that while you aren't poor, all you teach kiddies and their parents leads them down the path to serfdom.

Martin Brock February 8, 2009 at 1:35 am

Isn't this very same belief true for almost all of Europe? And doesn't Japan allow very little immigration?

Yes and yes, but Japan's population aging is particularly acute.

I'm wondering how much more intense the problem will be in Europe because of the massive influx of immigrants, …

A massive influx of immigrants is the best hope for continued growth of developed European economies, since the continent seems unlikely to sustain its own population and productivity growth alone seems unlikely to compensate for a shrinking labor force, particularly a labor force supporting an aged population that continues growing rapidly.

On the other hand, if population contracts indefinitely, expecting output to grow is just silly. Why should it? In this scenario, we must stop thinking of GDP contraction as "recession" and focus instead on the growth of per capita GDP or productivity of the labor force, and we should expand the labor force by limiting retirement and thus increasing the length of productive lives as life expectancy increases.

… most of whom, as I understand it, are immediately added to the welfare rolls while only a relatively few enter the work force.

I doubt this assertion, but if it's true, it's obviously a serious problem. I hear the same about U.S. immigration, and the assertion is false here.

Martin Brock February 8, 2009 at 1:55 am

Here's a nice, brief and graphical discussion of the demographic transition. By 2050, Japan's "population pyramid" is nearly inverted from the more natural shape that prevailed for millions of years, and although Japan heads down this road earlier and more rapidly than other nations, Japan's experience is not unique.

Some demographers diminish concerns over this transition by positing a "dependency ratio", including both minor children and retirees, that changes little as this inversion of the pyramid occurs; however, conflating children and retirees this way is more than a little misleading.

Children don't vote or own property, so they don't impose rents. Retirees do both disproportionately. Imagining a world without very heavy rents in coming decades is increasingly difficult, and these "stimulus" packages have more to do with creating these rents than we're acknowledging now.

Joe Norton February 8, 2009 at 12:53 pm

I have been reading Paul Krugman's "The Return of Depression Economics" in an attempt to see his argument for Keynesian spending, it's been difficult to read because of how much I differ from his beliefs… somehow he claims all other schools of thought rather than 'spending your way out' are 'fatalistic'…

but even in his own book he discusses Japan and says just how little their rampant spending did to correct their economy. Alas not everything is the cause of aggregate demand.

Glad you made a post about the situation Japan has been facing for some time now.

Martin Brock February 8, 2009 at 2:06 pm

Alas not everything is the cause of aggregate demand.

Saying that insufficient aggregate demand somehow "causes" unemployment is not equivalent to saying that just any spending restores employment and output valued by markets.

A state can simply make everyone a state employee, essentially eliminating market organization entirely. Then we couldn't measure "output" in terms of market prices, but we could measure it other terms, like some plebiscite asking people how much the love the Supreme Leader.

No law of economics implies that everyone starves in this scenario, but history suggests that people are a lot poorer in terms of their entitlement to consume what they want to consume.

So "aggregate demand" is not meaningless, and a relationship between aggregate demand and employment is not meaningless, but if inadequate demand accounts for systemic unemployment, we want to restore employment by "demanding" profitable reorganization to meet demands of free laborers and consumers, not by empowering our Supreme Leaders to demand whatever they want.

We can discuss how effectively to create this demand, but we must acknowledge the problem first. If we simply refuse to acknowledge it, we simply make ourselves superfluous, because people won't tolerate systemic unemployment for long. If the Supreme Leaders' demand is the only offer on the table, unemployed people will accept it.

Mat Maloney February 9, 2009 at 9:45 pm

It's funny, Obama just used Japan as a reason to spend, he must have missed this article.

plutosdad February 10, 2009 at 4:02 pm

At this point my main question is "where should I be putting my money?"

Seeing as the bill just passed the Senate (once they added enough Pork for friends of the Republicans) I figure we are going to be in a malaise for 10 years or so.

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