Did Keynes help Japan in the 90’s? Can he help US now?
Prominent Economists' Petition Contradicts Obama’s Claim
| Many people cling to the delusion that a crisis of excess debt can be solved by creating more debt. We trim, blend, and append two 2009 articles from the Democratic Freedom Caucus email list, Feb 3, on Keynes by O’Mara and the New York Times, Feb 5, on Japan by Fackler. |
by Mike O’Mara and by Martin Fackler
- Keynes Can’t Help Us Now
Even some Keynesians realized something was wrong with the theory in the 1970s when Keynesian policies led to stagnation and inflation at the same time, which was not supposed to be possible. Now, hundreds of economists, including some Nobel laureates, signed a statement that the Cato Institute ran in the New York Times, Washington Post, and elsewhere, rejecting Obama's claim that there is a consensus among economists regarding his approach. In part, it read:
We the undersigned do not believe that more government spending is a way to improve economic performance. More government spending by Hoover and Roosevelt did not pull the United States economy out of the Great Depression in the 1930s. More government spending did not solve Japan’s “lost decade” in the 1990s. As such, it is a triumph of hope over experience to believe that more government spending will help the US today. To improve the economy, policymakers should focus on reforms that remove impediments to work, saving, investment, and production. Lower tax rates and a reduction in the burden of government are the best ways of using fiscal policy to boost growth.
- Japan’s Big-Works Stimulus Is Lesson
Japan’s rural areas are paved over and filled in with roads, dams, and other big infrastructure projects, after government spent trillions trying to end a 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% of its $5.5 trillion economy -- while failing to generate a convincing recovery.
The Obama administration embarks on a similar path. Treasury Secretary Timothy Geithner, who was a young financial attaché in Japan during the Lost Decade, said spending must come in quick, massive doses, and be continued until recovery takes firm root.
Other economists say 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. Also, Japan ultimately did reduce consumption taxes.
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.
By 1996, growth reached 3% then slowed. Pro-spending economists blame spending cuts and tax increases. While spending remained high in the late 1990s, they say it was not high enough.
They say that every 1 trillion yen, or about $11.2 billion, spent on infrastructure increased Japan’s GDP 1.37 trillion yen, on social services like care for the elderly and monthly pension payments raised GDP 1.64 trillion, and on education boosted GDP 1.74 trillion yen.
Between 1991 and 1995, Japan spent some $2.1 trillion on public works, in an economy roughly half as large as that of America. Pro-spenders say the US should spend far more than the current $820 billion.
In total, Japan spent $6.3 trillion on construction-related public investment between 1991 and September of last year. Most Japanese economists say Japan spent more than enough, but wasted too much of it on roads to nowhere and other unneeded projects. Instead of spreading beneficial ripple effects across the economy, the spending drove out private investors in business.
JJS: Government, like anyone else, should fund day-to-day operations only from current income and borrow only to fund expansion. Government should pay back its bonds only from any resultant increase in the value of locations near its projects. Then people with savings won’t invest in white elephants like those littering Japan but in projects that would truly increase value. Governments, hoping to curry favor with voters, need this market discipline to rein in their deficit spending. That would avoid much waste of money and resources which taxes the environment.
Another way to curb deficit spending is to shift discretionary spending from politicians to citizens. That is, pay citizens a dividend a la Alaska’s oil dividend. Now while debts are piling up it may seem silly to speak of dividends but there is enough social surplus to pay one. That is, government could cut its losses, such as spending on militarism and agri-business, and raise its fees for privilege such as land titles, resource leases, and corporate charters. Adopting this geonomic policy, government would enjoy a bounty to share with citizens.
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Jeffery J. Smith runs the Forum on Geonomics.
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Also see: This period looks a lot like 1929-32
And the gold goes to …
The business press points to unstable underpinnings |
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