Numerous media figures have cited Japanese fiscal policy during the "lost decade" of the 1990s to criticize President-elect Barack Obama's plan to undertake a large-scale stimulus program. These media figures ignore evidence that, according to prominent economists, economic conditions were improving in Japan before the Japanese government temporarily abandoned stimulus spending in an attempt to reduce the deficit.
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In recent weeks, numerous media figures have cited Japanese fiscal policy during the "lost decade" of the 1990s to criticize a plan announced by President-elect Barack Obama to launch a large-scale economic stimulus plan that includes extensive spending for public works. These media figures ignore evidence that, according to prominent economists, economic conditions were improving in Japan before the Japanese government temporarily abandoned stimulus spending in an attempt to reduce the deficit. Nobel laureate and New York Times columnist Paul Krugman, for one, points to Japan's fiscal stimulus packages as having "probably prevented a weak economy from plunging into an actual depression."
Among the media that have recently cited the Japanese example to criticize Obama's plans is The Wall Street Journal, which asserted in a December 16 editorial:
As January 20 nears, Barack Obama's ambitions for spending on the likes of roads, bridges and jobless benefits keep growing. The latest leak puts the "stimulus" at $1 trillion over a couple of years, and the political class is embracing it as a miracle cure.
Not to spoil the party, but this is not a new idea. Keynesian 'pump-priming' in a recession has often been tried, and as an economic stimulus it is overrated.
The Journal editorial listed stimulus policies enacted by Japan between 1992 and 1999 and concluded that "Japan's economy grow [sic] anemically over that decade, but as the nearby chart shows, its national debt exploded ... Now we're told that a similar spending program -- a new New Deal -- will revive the U.S. economy. How do you say 'good luck' in Japanese?"
Contrary to the Journal's suggestion that stimulus spending was ineffective in Japan, Adam Posen, deputy director of the Peterson Institute for International Economics, wrote in his September 1998 book, Restoring Japan's Economic Growth, that "the 1995 stimulus package ... did result in solid growth in 1996, demonstrating that fiscal policy does work when it is tried. As on earlier occasions in the 1990s, however, the positive response to fiscal stimulus was undercut by fiscal contraction in 1996 and 1997." He concluded:
Similar contractions undertaken both openly and by hidden means in 1994, 1996, and 1997, with reference to announced but unimplemented spending, had destructive effects. Future government packages must recognize that when the Japanese government paid for fiscal stimulus in 1995, it got economic growth, and that when it mistakenly pursued fiscal austerity in most of the remainder of the 1992-97 period, it got economic contraction.
A 1999 budget brief from the Japanese Ministry of Finance demonstrates that the consumption tax was indeed increased from 3 to 5 percent in 1997. Other economists and media figures agree with Posen that the positive effects of the mid-decade stimulus packages were curtailed by these attempts to scale back spending and increase sales taxes. For example, in a December 1 New York Times column, Krugman wrote, "In 1996-97 the Japanese government tried to balance its budget ... And again the recession that followed led to a steep fall in private investment":
The idea that tight fiscal policy when the economy is depressed actually reduces private investment isn't just a hypothetical argument: it's exactly what happened in two important episodes in history.
The first took place in 1937, when Franklin Roosevelt mistakenly heeded the advice of his own era's deficit worriers. He sharply reduced government spending, among other things cutting the Works Progress Administration in half, and also raised taxes. The result was a severe recession, and a steep fall in private investment.
The second episode took place 60 years later, in Japan. In 1996-97 the Japanese government tried to balance its budget, cutting spending and raising taxes. And again the recession that followed led to a steep fall in private investment.
Just to be clear, I'm not arguing that trying to reduce the budget deficit is always bad for private investment. You can make a reasonable case that Bill Clinton's fiscal restraint in the 1990s helped fuel the great U.S. investment boom of that decade, which in turn helped cause a resurgence in productivity growth.
What made fiscal austerity such a bad idea both in Roosevelt's America and in 1990s Japan were special circumstances: in both cases the government pulled back in the face of a liquidity trap, a situation in which the monetary authority had cut interest rates as far as it could, yet the economy was still operating far below capacity.
In a December 15 washingtonpost.com online discussion, Krugman said that "the big message I take from Japan's experience is the folly of excessive caution. If you're half-hearted about taking on the slump -- if you wait to cut interest rates, nickel-and-dime your fiscal stimulus, penny-pinch on your bank bailouts -- then by the time you realize more is needed, deflation has set in, and it's really hard to get out of the trap. So you want to be really, really aggressive on policy early on." According to a December 7 Agence France-Presse report, Krugman also recently said that "[t]he experience of Japan in the 1990s was that indeed government spending, while it may not produce a permanent cure, can greatly alleviate the pressures on the economy."
Similarly, in an August 21 article titled "Lessons from a 'lost decade,' " The Economist stated that "fiscal stimulus did help to lift the [Japanese] economy" but deflation and "policy mistakes" kept Japan's economy from further recovering:
Japan's monetary and fiscal stimulus did help to lift the economy. After a recession in 1993-94, GDP was growing at an annual rate of around 2.5% by 1995. But deflation also emerged that year, pushing up real interest rates and increasing the real burden of debt. It was from here on that Japan made its biggest policy mistakes. In 1997 the government raised its consumption tax to try to slim its budget deficit. And with interest rates close to zero, the BoJ [Bank of Japan] insisted that there was nothing more it could do. Only much later did it start to print lots of money.
Additionally, while the Journal listed a series of Japanese stimulus packages enacted between August 1992 and April 1998 that added up to more than 76 trillion yen, in testimony before the U.S. House of Representatives in July 1998, Posen stated that "the Japanese government and the Ministry of Finance have way overstated the amount of fiscal stimulus in which they actually engaged." In his September 1998 book, Posen further stated: "The actual amount injected into the economy by the Japanese government -- through either public spending or tax reductions -- was 23 trillion yen, about a third of the total amount announced."
Despite indications that Japanese stimulus spending in the 1990s was effective in reviving the economy to the extent it was implemented, several media figures besides the Journal editorial page have similarly cited Japan's "lost decade" to denounce Obama's stimulus spending proposals:
- In a November 28 Wall Street Journal op-ed, Fox News contributor Karl Rove wrote that "[p]oliticians like infrastructure spending because it gives them something concrete to point to. But though Japan spent $516 billion on infrastructure in the 1990s, it didn't stimulate their economy. What makes Mr. Obama think it will work in America?" Rove also discussed the column on the December 2 edition of NBC's Today. Referring to Obama's planned stimulus package, host Matt Lauer asked Rove: "Is this plan destined to fail, in your opinion?" Rove stated that "one out of every four federal highway dollars are spent in the year that they're appropriated. Three out of four are spent years and years later. Japan put a half a trillion dollars into infrastructure spending in the decade of the '90s, and it didn't work in stimulating their economy."
- On the December 1 edition of Hardball, MSNBC political analyst Pat Buchanan told host Chris Matthews that "Obama is going to have a gigantic stimulus package," adding: "However, that was tried in Japan in the 1990s, Chris, and it did not work. They've got a national debt that is twice the size of their GDP, and it did not work. And they have enormous savings. So I'm very concerned that we're going to try this, it's not going to work, and you're going to see the last hurrah of the American dollar."
- During the December 16 edition of Fox News' Your World, Democratic strategist Brad Woodhouse stated that "it will take significant fiscal stimulus to get us out of this." In response, Cavuto asked: "When has that ever worked?" Cavuto later added: "[I]f spending money were the solution, then Japan would be the gold standard, right? They spent like crazy, building an infrastructure that was the world's envy and their roads in the end looked very nice, but for 10 years plus, after spending double what we're planning to spend as a percentage of their GDP, they're still a basket case."
- Amity Shlaes wrote in a December 10 Washington Post op-ed that "Japan in the 1990s" is an example of how "huge public works projects often fail to revive national economies." Shlaes, a senior fellow in economic history at the Council on Foreign Relations, further asserted: "The stimulus plans had the opposite effect of what was expected. Appalled at the country's new deficits, Japanese consumers closed their wallets." Shlaes concluded that "the private sector is often better than politicians at guessing what the market needs."
As Media Matters for America has noted, numerous conservative media figures and public leaders have similarly denounced the New Deal as ineffective or damaging to argue that government intervention on a comparable scale would exacerbate the current recession, without noting that employment numbers were indeed improving until President Franklin D. Roosevelt was persuaded to cut spending and raise taxes in an attempt to balance the budget.
From the December 1 edition of MSNBC's Hardball with Chris Matthews:
MATTHEWS: Pat, let me ask you about this. I always like to tell young people that maybe they're going to see what the '60s were like -- the early '60s, the New Frontier -- by watching this guy in action, the new president. I'm getting a feeling we may be looking at what the '30s are going to look like again. I'm wondering: Are you worried? Are you worried as a person about this economy?
BUCHANAN: I'm worried for this reason -- I'm worried for this reason, Chris. I know what Barack Obama is going to do. He's read the history of the Depression. He's come away with two lessons. One, the Fed did not respond, it did not save the banks, it did not re-flate the currency and put the blood back in the system. And, two, FDR was too timid with the New Deal. He didn't do enough. So Barack Obama is going to have a gigantic stimulus package, enormous spending, and the Fed's going to go all out.
However, that was tried in Japan in the 1990s, Chris, and it did not work. They've got a national debt that is twice the size of their GDP, and it did not work. And they have enormous savings. So I'm very concerned that we're going to try this, it's not going to work, and you're going to see the last hurrah of the American dollar.
MATTHEWS: Do you buy that theory that he's going to print money, Howard?
BUCHANAN: I think they're printing right now --
FINEMAN: Yes, sure.
BUCHANAN: -- excuse me. He's printing it right now.
FINEMAN: Yes -- no, of course.
MATTHEWS: Just start printing money, just start saying, you monetize the debt. It's a nice way of saying, print the money. The government runs a big deficit, the new dollars are paid for by printing more money -- creating more money.
FINEMAN: Well, Chris -- Chris, we've been doing it for a long time. Alan Greenspan started doing it right after 9-11. We've been doing it to a fare-thee-well. The problem is, we've done it practically to the extent that we can. The world is pretty much full up of dollars. At some point, there's going to be too many dollars. And that's the risk of inflation or the collapse of the American currency.
From the December 2 edition of NBC's Today:
LAUER: Let's talk about the economy. President-elect Obama's been pretty quick to get his economic team out there, and he's talked about what really amounts to a huge stimulus package that he'd like to see Congress act on immediately when he's sworn in. A lot of it is about rebuilding infrastructure in this country. And you wrote a piece recently that said -- about that rebuilding of infrastructure -- that it didn't work in Japan in the 1990s. And the reason, infrastructure is a poor stimulant, is -- there's a long lag time between project approval and when the dollars get spent. Is this plan destined to fail, in your opinion?
ROVE: Well, we don't know what the plan is yet. But he laid some broad outlines, giving money to states in infrastructure spending and couple of other items. And look, federal highway dollars, one out of every four federal highway dollars are spent in the year that they're appropriated. Three out of four are spent years and years later. Japan put a half a trillion dollars into infrastructure spending in the decade of the '90s, and it didn't work in stimulating their economy. If -- you know, there is a -- in that same statement where President-elect Obama talked about conservative and liberal economists agreed a big stimulus was necessary, but the disagreement exists as to what goes into it.
LAUER: First 100 days become kind of a measuring stick for any administration. You know that all too well. Probably not a good idea, but administrations are supposed to get off the mark surely and quickly. What would you -- obviously, the economy's issue number one.
LAUER: But other than that, what would you suggest the Obama administration handle as issue number one, other than the economy? And perhaps more importantly, what shouldn't they tackle as that issue?
ROVE: Yeah. Well, first of all, it is only the economy, and they ought to be -- stay focused on that. All the rest of this, whether it's health care reform or other things that he talked about in the campaign, they pale in significance to the economy. And you're right, 100 days is a bad measure. It really is 180 days, because 180 days is roughly the time from the time of the president's inauguration to the time that Congress goes out for its August break. And that's the time -- those 180 days are when a president really needs to make certain that he is working on all cylinders to get his package through.
From the December 16 edition of Fox News' Your World with Neil Cavuto:
WOODHOUSE: But I think it is sobering for our nation's leaders, for our citizens that we really are in a deep recession, that we face tremendous challenges, and it will take significant fiscal stimulus to get us out of this, to return some confidence to the economy and invest in things that can stimulate the economy in the short term but can recover the economy in the long term.
CAVUTO: When has that ever worked, when you spend a lot of money to get out of a hole? When has it worked?
WOODHOUSE: Well, you know, look -- you know, some people think it worked -- some people think it worked in the 30s, I guess, with the New Deal, and --
CAVUTO: Well, I could argue that World War II got us out of that, but go ahead.
WOODHOUSE: Well, I mean, I think, you know that that certainly -- well, that was a big spending program in and of itself, but there is no doubt that this does present an opportunity to make critical investments that most people agree that we needed to make even before the financial crisis. I mean, remember the bridge collapse in Minnesota, and people said we had this deficit in terms of infrastructure, not only building infrastructure for the future but repairing infrastructure we need to transport goods and services and commerce today, so --
CAVUTO: Well, I see your point, Brad. But if spending money were the solution, then Japan would be the gold standard, right? They spent like crazy, building an infrastructure that was the world's envy and their roads in the end looked very nice, but for 10 years plus, after spending double what we're planning to spend as a percentage of their GDP, they're still a basket case.
WOODHOUSE: Well, you know, Neil, it may or may not work. It certainly -- we are, as you suggest and I think what the Fed action today suggests, we're running out of arrows in the quiver. But remember, look at this --
CAVUTO: But who says we are? But who says we are? I mean, there are more arrows in those quivers; they're just not the obvious ones.