Monday, January 25, 2010


Doug French on the Japanese Lesson

One of the crazier aspects of our financial and economic discourse is that the Great Depression is cited as the result of laissez-faire, when in fact Hoover and then FDR intervened more heavily in a recession than any prior presidents in US history.

By the same token, we are told that the U.S. government needs to run huge deficits, and the Fed needs to provide easy money, in order to avoid the fate of Japan. From this "moral" you would understandably infer that Japan's "lost decade" must have been characterized by balanced budget and super-high interest rates. Not so, as Doug French explains (HT2 Carlos Lara):
After the bubble popped in Japan, that government pursued a relentless Keynesian course of fiscal pump priming and loose fiscal policy with the result being a Japan that went from having the healthiest fiscal position of any OECD country in 1990 to annual deficits of 6 to 7 percent of GDP and a gross public debt that is now 227 percent of GDP. "The Japanese tried to cure an alcoholic with heroin," writes Bonner. "Now, they're addicted to it."

Japan's monetary policy was to aggressively lower rates to .5 percent between 1991 and 1995 and has operated a zero-interest policy virtually ever since.

Between 1992 and 1995, the Japanese government tried six stimulus plans totaling 65.5 trillion yen and they even cut tax rates in 1994. They tried cutting taxes again in 1998, but government spending was never cut. Also in 1998, another stimulus package of 16.7 trillion yen was rolled out nearly half of which was for public-works projects. Later in the same year, another stimulus package was announced, totaling 23.9 trillion yen. The very next year an ¥18 trillion stimulus was tried, and, in October of 2000, another stimulus for 11 trillion was announced. As economist Ben Powell points out, "Overall during the 1990s, Japan tried 10 fiscal stimulus packages totaling more than 100 trillion yen, and each failed to cure the recession," with Japan's nominal GDP growth rate below zero for most of the five years after 1997.
Now of course, Krugman & Friends can come back and say, "Japan didn't do enough!" But even if that were true, doesn't this same cynical Krugman realize that no politicians are going to do exactly what his models suggest (thank goodness)? In other words, if Krugman & Friends know that the 85% Keynesian Solution pushed through by politicians will lead to the worst economic performance ever (in the 1930s in America and the Lost Decade in Japan), then maybe Krugman & Friends should stop pushing it?

Japan not doing enough is exactly the argument Krugman makes in his book The Great Unravelling, which is just a collection of his NYT columns from the early Bush years. In fact, he cites the lesson of Japan as an example of how critically important it is to throw everything possible, as early as possible, at a deflationary recession.

You have to love his logic.....his theories are unfalsifiable.
As someone who is concerned that we're going to experience inflation soon in the U.S. as a result of the massive increase in government spending, I'm not sure what to make of Japan. In other words, why hasn't the tremendous government spending by the Japanese government led to inflation there? What am I missing?
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