Some Lessons From Japan for the US Stimulus Package

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Macroeconomics

The scale of the US stimulus plan is often referred to as unprecedented and certainly is in terms of a one off package but following the banking collapse of the early 1990’s, Japan went through a similar massive government debt funded stimulus effort that may have lessons for us in evaluating the likely effect of this administration’s package, or so thinks the New York Times in an interesting article this week.

Japan spent some $6.3 trillion between 1991 and 2008 with the peak between 1995 and the early 2000’s. Of this some $2.1 trillion was directly invested in public works such as roads, bridges, prisons, schools, museums and tourist attractions like aquariums and ski resorts. Even the Japanese would admit their major failure was a) starting too late ” peak spending was not until 1995-2000, some five years after the banking collapse started and b) they never did tackle the banks structural problems by addressing the toxic debt on their books. However this $2.1 trillion of public works dwarfs the US plans for $800 billion never mind the much smaller $150-200bn on roads, bridges and similar infrastructure, and this on an economy half the size of the USA. In the process Japan increased it national debt to a staggering 180% of its $5.5 trillion GDP, the highest in the developed world. A debt its ageing population will have to pay back for generations to come.

Commentators differ as to how effective this massive investment has been. Interestingly US economists, like the new Treasury Secretary Tim Geithner believe it was very effective and their only mistake was throttling back in the early part of this decade before the recession was over. Others, notably many Japanese economists believe it was almost a complete waste of money. The Japanese believe the money would have been much better spent in two ways. First, restructuring the banking system by removing the toxic debt from the banks books and getting the financial system back into health. And second, in investing a much greater proportion into – wait for it – education and health care. The reason being that jobs created by construction of bridges and roads last while the project is under construction but disappear on completion, whereas in an ageing knowledge based economy, investments in education and health care boost the productive capacity of the workforce for the long term. Infrastructure investment stimulates emerging economies disproportionately to developed economies.

Both Japanese economists and economic commentators went on to observe that far too much money was channeled into politicians pet projects, usually in their own backyards resulting in bridges to nowhere, deserted rural highways and under utilized sports stadiums and concert halls. In addition, by massive government spending in these areas, private enterprise becomes squeezed out and eventually withers in a vacuum of opportunity. The economy comes to depend on government sponsored investment rather than private enterprise. Apart from schools, the most lasting investments were considered to be aquariums, museums and other tourist attractions because they encouraged families to settle in more rural cities, saving them from decline and generating long term employment.

It is interesting to see that Obama’s package does have large tranches of cash lined up for education and health care but what is also clear is that these are very much long term investments. Future generations may come to look at expenditure in these areas and feel their higher taxes (because rest assured we are going to pay for this) are justified by the greater productivity of the American economy they have created. But if anyone is expecting these measures to generate a short term boost they could be disappointed by the impact. Most people are looking at this stimulus package as a short term fix – big investment now and the economy will be back to its normal health in 12-18 months time. But even allowing for the mistakes in Japan’s state stimulus ” timing and focus ” the time taken to recover to strong growth, low unemployment, steadily rising house prices, robust GDP growth, etc, could still be years away. More stimulus packages may be required and most worrying of all the government has repeatedly shied away from tackling the root cause of the problem ” those toxic bank debts.

–Stuart Burns

Comments (3)

  1. LP says:

    The big banks are insolvent. Unfortunately we will have to nationalize them now and hopefully privatize them later. However, this will never happen as the stigma of being “socialist” is too much to bear for the politicians that let this mess unravel. But I think that there is no way around it.

    During the great depression, toxic assets were bought and held by the gov. However, that move was financed by deposits from the citizens. This time around we would have to borrow 3 to 4 trillion from the likes of China.

    I also think one party is way off base with Tax cuts and the other is not focusing on the root cause of the problem. But I do agree, this investment will lead to a higher inflation in the mid run and a new bull market in 6 to 8 years. However, the stimulus may do nothing in the short run.

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