Perhaps It’s Not That Important
On one side of the Great Bailout Debate, we have those that claim that tax cuts are pointless. After all, we cut taxes a bunch of times during the Bush Administration and look where we ended up? Our infrastructure is in shambles, education spending is sinking, health care is still unaffordable for many Americans, and we’re currently experiencing the worst recession since the ’80s. Clearly, tax cuts aren’t the way to grow an economy. On the other side of the Great Bailout Debate, meanwhile, we have those that point to Japan, which followed the Keynesian playbook almost perfectly - it threw itself into debt, spent money on creating jobs, built all kinds of infrastructure… but barely grew at all. The New York Times (Via Instapundit) is there:
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.
Now, as the Obama administration embarks on a similar path, proposing to spend more than $820 billion to stimulate the sagging American economy, many economists are taking a fresh look at Japan’s troubled experience. While Japan is not exactly comparable to the United States — especially as a late developer with a history of heavy state investment in infrastructure — economists say it can still offer important lessons about the pitfalls, and chances for success, of a stimulus package in an advanced economy.
In a nutshell, Japan’s experience suggests that infrastructure spending, while a blunt instrument, can help revive a developed economy, say many economists and one very important American official: Treasury Secretary Timothy F. Geithner, who was a young financial attaché in Japan during the collapse and subsequent doldrums. One lesson Mr. Geithner has said he took away from that experience is that spending must come in quick, massive doses, and be continued until recovery takes firm root.
Okay, let’s make sure we follow this logic: Japan racked up some amazing debt - 180% of its GDP, which, were we to match that, would require a staggering $14 trillion increase in Federal debt - on infrastructure spending, hoping to turn around their economy. The economy didn’t turn around - in fact, growth was stagnant. So, based on this experience, economists have successfully learned that infrastructure spending works and helps grow economies. If this sounds awfully, shall we say, faith based, well, perhaps this might help:
But some Western economists who have studied Japan’s experience say the stimulus accomplished more than it is now given credit for. At a minimum, they argue, it saved the economy from an outright, 1930s-style collapse.
Moreover, they say, any direct comparison of Japan and the United States is inevitably misleading, because Japan has spent so much more over the years on infrastructure. Having neglected its roads, bridges, water treatment plants and more over the years, the United States is bound to generate a greater payback for such spending than would Japan.
Beyond that, 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.
That’s right - Japan didn’t succeed because they didn’t believe enough. Apparently, racking up the highest level of debt in the developed world isn’t enough belief. Of course, if that wasn’t it, there’s always the other old faith-standby: They were doing it wrong!
Economists said the finding suggested that while infrastructure spending may yield strong results for developing nations, creating jobs in higher-paying knowledge-based services like health care and education can bring larger benefits to advanced economies like Japan, with its aging population.
“In hindsight, Japan should have built public works that address the problems it faces today, like aging, energy and food sources,” said Takehiko Hobo, a professor emeritus of public finance at Shimane University in Matsue, the main city of Shimane. “This obsession with building roads is a holdover from an earlier era.”
See, when you’re praying, it’s helpful to follow the right rituals.
Now, I know what some of you are thinking. But Dave… tax cuts had the exact same results! All of the arguments that tax cut proponents use are almost identical! That’s absolutely true! We cut taxes, went further into debt (albeit not as severely as Japan’s) and what do we have to show for it? By the time the recession ends in 2010 (if that soon), our economy will probably be at about the same size as it was in 2005. Tax cut proponents offer the same litany of arguments, too. “We didn’t cut taxes far enough. We didn’t cut taxes on the right people. We didn’t decrease spending. We didn’t cut taxes fast enough.” On and on they go, each side trotting out their numbers, each side coming up with data samples that sort of prove their point, each side completely missing the big picture:
The simple, sad, honest truth is that, as far as the economy in any reasonably developed country is concerned, the government doesn’t matter.
The trouble with any large, well developed economy is that, short of converting to absolute state-owned communism, the government will never be a big enough player in the economy to truly control it. Don’t get me wrong - if you throw spending up high enough or increase tax receipts enough, government will still be a big player. However, there are still far too many little players running around doing their own thing for even the biggest player (which government invariably will be) to have any real, considerable control over the business cycle. The most government can do is either soften or amplify the cycle a little and, frankly, that’s only true as long as the rest of the players are willing to play along, which isn’t always guaranteed. Besides, government’s motivation tends to be somewhat mixed - case in point:
In Hamada, residents say the city’s most visible “hakomono,” the Japanese equivalent of “white elephant,” was its own bridge to nowhere, the $70 million Marine Bridge, whose 1,006-foot span sat almost completely devoid of traffic on a recent morning. Built in 1999, the bridge links the city to a small, sparsely populated island already connected by a shorter bridge.
“The bridge? It’s a dud,” said Masahiro Shimada, 70, a retired city official who was fishing near the port. “Maybe we could use it for bungee jumping,” he joked.
Koichi Matsuoka, a retired professor of policy at the University of Shimane in Hamada, said useless projects like the Marine Bridge were the reason that years of huge spending had brought few long-term benefits here. While Shimane has had the highest per capita spending on public works in Japan for the last 18 years, thanks to powerful local politicians like the deceased former Prime Minister Noboru Takeshita, its per capita annual income of $26,000 ranked it 40th among Japan’s 47 prefectures, he said. He said the spending had left Shimane $11 billion in debt, twice the size of the prefectural government’s annual budget.
Herein lies the rub - government funds tend to get spent on what the politically powerful want, not what people will actually use. This is why capitalism is so compelling: Regular businesses can only afford to build what people are willing (or capable) of paying for. Government spending doesn’t labor under such constraints. Given a choice between paying for a bunch of junk that nobody but the politically connected want and paying for a bunch of junk that I might actually use from time to time, I know which way my alliegance lies.
politics, pork | David Colborne | 
February 6, 2009 9:57 am
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