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:
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:
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.
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:
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.
