Out of Control Policy Blog

Stimulus and Japan's 'Lost Decade'

Today's New York Times has a lengthy and very useful overview of Japan's attempt to stimulate its economy during it's so-called "lost decade." Actually, it lasted longer than a decade. Japan experienced a protracted period of recession and stagnant growth, lasting from the Asian financial crisis in the last 1980s until the early part of this decade. This was quite a stunning reversal after decades of heady growth as it joined the ranks of the high income nations in the wake of World War II.

What caught my eye was the following:

Economists tend to divide into two camps on the question of Japan’s infrastructure spending: those, many of them Americans like Mr. Geithner, who think it did not go far enough; and those, many of them Japanese, who think it was a colossal waste.

Among ordinary Japanese, the spending is widely disparaged for having turned the nation into a public-works-based welfare state and making regional economies dependent on Tokyo for jobs. Much of the blame has fallen on the Liberal Democratic Party, which has long used government spending to grease rural vote-buying machines that help keep the party in power.

In fact, Japan erred by spending an aweful lot of money on "roads and bridges to nowhere."

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.

So, at the end of the day, the pro-stimulus followers are left with the following: "Even though it hasn't worked in the past, this time we'll get it right! Trust us, we're from the government."

Samuel Staley is Research Fellow


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