Learning from Japan’s Big Debt Spending Failure
Conn Carroll /
The New York Times reports today:
Japan’s rural areas have been paved over and filled in with roads, dams and other big infrastructure projects, the legacy of trillions of dollars spent to lift the economy from a severe 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 percent of its $5.5 trillion economy — while failing to generate a convincing recovery.
This should not be news to any responsible law maker. Heritage Senior Research Fellow Ron Utt wrote in October of 2001:
The United States was not the only country to experience an economic downturn in 1991 as the Gulf War and its impact on energy prices and business confidence depressed commerce worldwide. Although the negative impact on the U.S. economy was brief and shallow, the effect in Japan was much more severe, exacerbated by that country’s highly leveraged and overextended financial system and inefficient service, agriculture, and distribution sectors.
Beginning in 1991-1992, Japan adopted the spending approach now advocated by many in the U.S. Congress when it embarked on a massive nationwide program of infrastructure investment. Between 1992 and 2000, Japan implemented 10 separate spending stimulus packages in which public infrastructure investment was a major component.
Combined with increases in other government spending programs, Japan’s efforts to spend its way to prosperity led to substantial increases in government spending as a share of GDP. … Japan’s failed policies had severe negative consequences for its economy and citizens. …[M]easured in inflation-adjusted GDP growth, Japan went from being a high-growth country in the 1980s to a slow-growth country during the 1990s. … For the average Japanese citizen, the chief consequence of this economic underperformance has been both a relative and an absolute decline in the nation’s standard of living, defined by per capita GDP as measured by the World Bank and adjusted for differences in purchasing power parity (PPP).
Back to today’s NYT:
… proponents of Keynesian-style stimulus spending in the United States say that Japan’s approach failed to accomplish more not because of waste but because it was never tried wholeheartedly. They argue that instead of making one big push to pump up the economy with economic shock therapy, Japan spread its spending out over several years, diluting the effects.
Most Japanese economists have tended to take a bleaker view of their nation’s track record, saying that Japan spent more than enough money, but wasted too much of it on roads to nowhere and other unneeded projects.
Dr. Ihori of the University of Tokyo did a survey of public works in the 1990s, concluding that the spending created almost no additional economic growth. Instead of spreading beneficial ripple effects across the economy, he found that the spending actually led to declines in business investment by driving out private investors. He also said job creation was too narrowly focused in the construction industry in rural areas to give much benefit to the overall economy.
Back to Utt in 2001:
Although Congress is split over whether the stimulus package should be comprised of tax cuts or spending increases or some combination of both, lessons derived from such past efforts at home and abroad demonstrate that strategies relying on increased spending will fail. Indeed, such lessons also suggest that such strategies make things worse by diverting scarce resources away from productive use in the private sector.