Japanese politicians clearly haven't learned any lessons from their collectivist school of hard knocks. They are now repeating the spending mistakes they made during the 1990's.
In a repeat example of what no one should do during an economic reversal, the Japanese government has once again started spending money that neither it nor its electorate can afford to spend. They are still under the impression that the economic machinations of John Maynard Keynes are correct. But they're not.
Keynes proposed that during recessions or depressions, the government of a given country can increase its spending and debt to jump start an economy out of its doldrums. In the past, this method of operation has been tried – and repeatedly. And virtually every time it's tried, it becomes nothing more than a costly mistake.
In fact, Japan and many other countries have already tried this. Germany tried it just prior to WWII, and became the one country on earth with the worst inflation rate ever. The US tried it during the Hoover administration; then during Roosevelt's administration; then again during the Carter administration. It failed each time. Japan, in particular, has become an extraordinarily clear case of how economically unsound Keynes's ideas can be. After the Second World War, Japan was seen as a unique model of economic policy, combining government and business in an original mix. And by the 1980's, Japan achieved what was widely described as a “miracle” in economic growth. But when the '90's came around, the people of Japan were left with an economy in stagnation and debt that amounted to one and a half times its GDP. And they have yet to fully recover.
In fact, Japan spent the sum total of 100 trillion yen ($950 billion, U.S.) on nearly a dozen stimulus programs from 1990 to 2000. The majority of the monies were spent on public works projects. They even lowered their interest rate to zero in 1999, but to no avail. Borrowing remained as stagnant as the whole of the economy.
Following the same Keynesian mentality, the government then began bailing out failing banks, and nationalizing others to the tune of over $500 billion dollars; purchasing publicly traded companies, and lending directly to consumers. They also bought huge amounts of euros; intentionally devalued their own currency; restricted and manipulated the credit markets, and gave companies the government deemed TBTF (too big to fail) a nice line of credit, totaling 20 trillion yen. I have to keep this list short for the sake of blogging format; but there were other measures taken. If we take all of this into account, we can hardly say that since Japan has spent over a dozen years and the equivalent of 1 trillion U.S. dollars trying to resuscitate their feeble economy, that they haven't done or tried enough. Clearly they have. The government has manipulated its way through virtually every corner of the economy. What's most disconcerting is that Japan's economy is less than one third the size of the U.S. economy. If one trillion dollars didn't work for them, it's not likely to work for us either.
But, not surprisingly, the Japanese government has stated a new intention to spend another 10 trillion yen ($105 billion, U.S.) on infrastructure, and other government stimulus programs. And its budget has swelled to an unprecedented 88.5 trillion yen ($990.9 billion, U.S.). They've stated, once again, that they are reducing their interest rate. And, once again, they are hastily beginning a 13 billion dollar “emergency” lending program. If only they would learn that infrastructure spending simply doesn't work in stimulating the economy.
Since I'm a government cynic, I can't say I'm surprised. What they appear to be doing, though, is following the lead of several other countries that can't pull themselves away from their past mistakes, and the overly simplistic and coercive ideas of Keynes and the New Keynesians. Nobel Prize winning economist Paul Krugman, in my humble opinion, is one such New Keynesian.
Several years ago he stated “Japan's postal savings system, which channels money into public works projects that have little if any social payoff, is monumentally inefficient; so is the practice of rolling over the debts of companies that will never regain profitability and hence keeping capital employed producing what nobody wants.” (Krugman, 2001)
Ironically, Krugman also stated in 2008 that massive infrastructure spending is needed for the U.S. economy to turn around. He said "[f]iscal expansion will be even better for America's future if a large part of the expansion takes the form of public investment - of building roads, repairing bridges and developing new technologies, all of which make the nation richer in the long run."
So either Mr. Krugman:
Has forgotten what he said years ago
Is conflicted over whether or not public works programs act as a real stimulus
Has under-estimated the efforts of the Japanese government
Has monumentally over estimated the value and effectiveness of the American government
Thinks the Japanese haven't been thrifty enough
Wants bailouts
Doesn't want bailouts
Or simply can't make up his mind
One would expect to see a little more logic from a Nobel Prize winner. But none of that, ultimately, is important. He's in excellent company. Ben Bernanke, Henry Paulson, George Bush, Barak Obama and many other monetary manipulators still share his view. They all have what Frederick Von Hayek called “The Fatal Conceit.” They still believe in the ill-conceived notion that a small group of intelligent and powerful individuals can tweak an economy just right to force prosperity. They all have the one, undying devotion to the idea that the economy will recover, if only everyone else will just listen to them. The communists thought the same thing: so long as everyone co-operates, prosperity can be had by all.
But history paints a much dimmer picture of such ridiculousness. And in my opinion, such ideas of controlling others say much more about the nature of the individual who believes in them than the ideas themselves - whether the ideas work or not. In the words of Ayn Rand, “The creator's concern is the conquest of nature. The parasite's concern is the conquest of men.”
So we are at a very serious crossroads. Either we tell the bureaucrats, pseudo-bureaucrats, monetarists and do-gooders to get out of the peoples' economy now, or we will most likely be looking at a “lost decade” ourselves - and that might be the least of our worries. The mindset brought on by Keynes is obviously a tough nut to break. But, however difficult it may be at first, letting go of the economy is not unlike the letting go of a child who's leaving home for the first time. Eventually you must let go. It's what's best for the prosperity of the child. And you. If you refuse, you're setting yourself up for a catastrophe.
In the words of Austrian economist Jeffrey Herbener: “Let us hope that the legacy of Japanese debacle is the acceptance of the lesson Ludwig Von Mises taught us in 1912: that the Keynesian miracle of central-bank monetary inflation and credit expansion is counterfeit and must end in crises and depressions.”
So, ultimately, the best thing the government can do now is take their feet off of the financial brakes, take their hands off of the economic steering wheel, and let the economy drive itself to whatever destination it desires most – which is, of course, equilibrium. And the people who promote this notion best are the Austrian Economists, with their Austrian Business Cycle.
The whole story of Japan. “The Rise and Fall of the Japanese Miracle”
This Washington Post story states: "The stimulus plans had the opposite effect of what was expected." The writer even says that the programs have become more like an economic "cancer."
Read Paul Krugman's argument here.
“The US credit crunch is a hoax.”
“Goodbye Japanese Miracle”
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