Avoid Ja­pan’s mis­takes

The Washington Times Weekly - - Commentary -

Those who think the $787 bil­lion “stim­u­lus” bill will chase the blues from the econ­omy should look at Ja­pan’s ex­pe­ri­ence in the 1990s, where a suc­ces­sion of in­ter­est-rate cuts and Key­ne­sian spending ini­tia­tives did lit­tle but pro­long the down­turn. The re­sult was a decade of lost growth.

The United States is fac­ing a fi­nan­cial cri­sis re­mark­ably sim­i­lar to the one that struck Ja­pan. We would be wise not to re­peat the same mis­takes. In both cases, low in­ter­est rates helped fuel a fi­nan­cial bub­ble and in­flate stock and real es­tate prices. The bub­bles even­tu­ally burst, pum­mel­ing stock and real-es­tate val­ues.

So far the mag­ni­tude of the U.S. re­ces­sion pales in com­par­i­son to Ja­pan’s. Ja­pan’s real es­tate prices plum­meted nearly 80 per­cent from 1991 to 1998. The Nikkei stock mar­ket in­dex fell ap­prox­i­mately 70 per­cent. Much of the con­trac­tion occurred in the years fol­low­ing the ini­tial cri­sis as one gov­ern­ment ini­tia­tive af­ter an­other failed to re­vive the econ­omy.

Ja­pan tried de­creas­ing in­ter­est rates, bail­ing out and na­tion­al­iz­ing banks, and en­act­ing mul­ti­ple fis­cal stim­u­lus pack­ages. Noth­ing worked; and there’s noth­ing to in­di­cate sim­i­lar mea­sures will work bet­ter to­day.

The Ja­panese adopted fis­cal stim­u­lus bills early in the cri­sis. Be­tween 1992 and 1995 the Ja­panese passed six dif­fer­ent stim­u­lus pack­ages to­tal­ing 65 tril­lion yen. The av­er­age yearly stim­u­lus amounted to a lit­tle more than 3 per­cent of the to­tal Ja­panese gross do­mes­tic prod­uct (GDP). The nearly $800 bil­lion U.S. stim­u­lus bill amounts to about 6 per­cent of GDP.

Yet big­ger is not bet­ter. In 1998, Ja­pan’s stim­u­lus ef­fort amounted to about 8.5 per­cent of GDP. The re­sults were neg­li­gi­ble.The Ja­panese were a lit­tle slower to cut in­ter­est rates. By the mid-1990s, how­ever, the of­fi­cial dis­count rate, or the rate at which fi­nan­cial in­sti­tu­tions bor- row from the cen­tral bank, was down to 0.5 per­cent. It reached zero a few years later. The U.S. Fed­eral Re­serve has been quicker to act. The fed­eral funds rate — the rate at which banks lend to other banks — al­ready is down to near zero per­cent. But the re­sults are the same: nada.

Wash­ing­ton al­ready has ap­proved $700 bil­lion to bail out ail­ing banks — and the ad­min­is­tra­tion is get­ting ready to ask for more. Large-scale bank bailouts and na­tion­al­iza­tion didn’t oc­cur in Ja­pan un­til 1998 and 1999. And when the Ja­panese fi­nally did step in to bail out their banks the econ­omy re­sponded — with the two worst years of eco­nomic de­cline dur­ing the en­tire trou­bled decade.

Amer­ica’s move to act swiftly and boldly misses the point. Bank bailouts and fis­cal stim­u­lus bills don’t work be­cause they strive to main­tain the sta­tus quo. But the sta­tus quo is the prob­lem and ex­actly what needs to be cor­rected.

The U.S. hous­ing bub­ble drew too many work­ers and too much cap­i­tal into construction and re­lated in­dus­tries. So fund­ing pub­lic works projects to keep those com­pa­nies in busi­ness is the wrong so­lu­tion.

Like the Ja­panese, Pres­i­dent Obama is stress­ing the ben­e­fits of in­fra­struc­ture spending in his pro­posed stim­u­lus pack­age. He re­cently boasted, “My plan con­tains the largest in­vest­ment in­crease in our na­tion’s in­fra­struc­ture since Pres­i­dent Eisen­hower cre­ated the na­tional high­way sys­tem half a cen­tury ago.” In re­sponse, Cater­pil­lar Corp, a man­u­fac­turer of heavy construction equip­ment, promised it would even­tu­ally re­hire some of the 22,000 work­ers it had laid off, though more short­term lay­offs were pos­si­ble.

To achieve long-term eco­nomic re­cov­ery, mar­ket forces, not po­lit­i­cal forces, need to di­rect cap­i­tal and la­bor to their most pro­duc­tive uses.

“Stim­u­lus” bills that em­pha­size pub­lic works and in­fra­struc­ture merely prop up the over­ex­panded construction in­dus­tries. Yet it th­ese very same busi­nesses and in­dus­tries that most need to shed work­ers and con­tract be­fore re­cov­ery can oc­cur. When acts of Congress de­lay lay­offs and re­struc­tur­ing they also de­lay re­cov­ery.

As painful as it might be in the short term, the United States econ­omy would be bet­ter served if we al­lowed the re­ces­sion to run its course. Un­em­ploy­ment would surely rise and there would be con­sid­er­able short-term pain. But in the end, cap­i­tal and la­bor would be re­al­lo­cated to other in­dus­tries and uses, cor­rect­ing the ex­cesses of the bub­ble. That would help the econ­omy be­gin grow­ing again.

Ben­jamin Pow­ell is a re­search fel­low at the In­de­pen­dent In­sti­tute, Oak­land, Calif., and an as­sis­tant pro­fes­sor of eco­nomics at Suf­folk Uni­ver­sity in Bos­ton. He is co-ed­i­tor of the forth­com­ing book, “Hous­ing Amer­ica: Build­ing Out of a Cri­sis.”

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