Ever since the start of our current financial disaster various economists and pundits have been comparing first the US banking problems with Japan’s, and then more recently the infrastructure-heavy stimulus program with Japan’s construction state. Today’s NYT has a substantial article that easily marks the most high profile comparison yet. I’m certainly no economist and I’m not even taking the time to look at numbers right now, but my quick take on the issue is that the comparison is being significantly overblown, but it is still a very worthwhile comparison to make, so that Japan’s various successes and mistakes can be absorbed as lessons. See the following summation of Japan’s massive pork spending:
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.
He agreed with other critics that the 1990s stimulus failed because too much of it went to roads and bridges, overbuilding this already heavily developed nation. Critics also said decisions on how to spend the money were made behind closed doors by bureaucrats, politicians and the construction industry, and often reflected political considerations more than economic. Dr. Ihori said the United States appeared to be striking a better balance by investing in new energy and information-technology infrastructure as well as replacing aging infrastructure.
Japan’s huge boom in public works spending was less a national stimulus program than a gigantic rural welfare program of pork-barrel projects designed to prop up the ailing LDP in its long decline. The money was largely directed not to the areas where it would benefit the largest number of people, but the areas where it would benefit the largest number of politicians. This was not done entirely out purely cynical political motives but also due to a genuine desire to arrest the decline of the rural regions themselves, in the face of continuing urbanization and a decline in Japan’s traditional and lionized (if anachronistic) agricultural lifestyle. Regardless of intent, a huge proportion (I won’t use words like “most” without looking at actual numerical research) of the spending was “stimulus” but not “investment”.
I am very, very wary of the general principal of “economic stimulus.” I am not opposed to government spending, or even large amounts of government spending, as long as it is being spent on something that is actually necessary or build further value in the future, i.e. services or investment. I think this attitude should be obvious from the mass transit funding letter I wrote and posted here a few days ago. In short, I worry that the discussions on spending currently ongoing in Washington may turn into a series of worthless boondoggle projects oriented at unpopulated rural areas, combined with random tax cuts and other expenditures poorly aimed at short-term (i.e. one election cycle) economic recovery, while continuing to ignore the trillions of dollars in outstanding repairs or upgrades as well as vital new investment that the country needs. I think it’s safe to say that politicians are going to spend this money. The question is, what will it buy us? Would we rather have a bunch of bridges to nowhere, vacant museums and amusement parks in virtually deserted rural towns, and paved-over mountain tops, or would we rather have a modern electrical grid, mass transit that at least meets late 20th century standards if not 21st century, a safe and reliable water system, bridges rated to not collapse, and maybe even an adequate system of public health care?
2 thoughts on “Stimulus or investment? Japan vs. USA”
One thing that bothers me about the debate is that our elected officials insists that failure is certain if we do not pass a $900 billion package. This is what Obama wrote in his oped
“And if nothing is done, this recession might linger for years. Our economy will lose 5 million more jobs. Unemployment will approach double digits. Our nation will sink deeper into a crisis that, at some point, we may not be able to reverse.”
May not be able to reverse? That’s his call to action?
$900 billion seems like a massive number, but the money is spread so thinly towards every possible sector of the economy it looks more like stimulating votes instead of the economy.
If we are to spend this much money, I’d say keep it simple. Use one part to cut the corporate tax rate in half and a one and half year payroll tax holiday and rest on infrastructure.
If the man quoted in this blog is right, Japan is going to need a little more than a stimulus:
Today, Yomiuri ran an article on how the results of a recent opinion poll show that the LDP is swirling in the bowl, and in danger of losing power to the DPJ:
I feel that I have seen these indications of a potential change in control, and yet somehow the LDP stays in power, despite their obvious impotence in so many areas…
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