February 24, 2009
When it comes to implementing an economic recovery, nobody wants to be Japan. The story of Japan’s efforts to revive a sputtering economy during its Lost Decade of the 1990’s has become a cautionary tale for those monitoring the current U.S. economic crisis.
Eying warily the similarities of the two crises — among them a credit squeeze, housing prices in freefall, and the stock market down sharply from recent record highs —both sides of the political spectrum can agree on at least one thing: We can’t make the same mistakes as Japan.
Unfortunately, no one seems to agree on what those mistakes were.
One major component of Japan’s efforts to bolster its economy in the 1990’s was government spending on infrastructure. Small-government opponents of President Obama’s proposed stimulus point to Japan’s struggles as proof a New Deal-redux spending jolt is ill advised
A December report from the conservative Heritage Foundation, “Learning from Japan: Infrastructure Spending Won’t Boost the Economy,” provided a representative set of talking points — government infrastructure spending doesn’t work, those who credit such spending with pulling the U.S. out of the Great Depression are wrong, and one only needs to look to Japan to see those lessons in practice. Citing Japan as “the last major country that tried to spend its way to ‘stimulus’” in a Dec. 16 editorial, the Wall Street Journal editorial page cited its Lost Decade as evidence that the stimulus package now nearing Congressional approval was likely to be an economic dud.
But stimulus supporters contend Japan’s spending efforts didn’t go far enough and were undermined by fiscal timidity. Over the past several months, Nobel laureate Paul Krugman, of Princeton and the New York Times, has argued for a huge injection of government spending with a focus on infrastructure. He argues that Japan’s infrastructure spending was the right approach, but that it was undermined by Japanese efforts to balance its budgets at the same time. In short, if you’re going to try to spend your way out of a recession, you better go all out.
And Treasury Secretary Timothy Geithner recently told the Wall Street Journal he took his own lesson from Japan's crisis: Decisiveness is key.
Japan’s infrastructure spending failed to spare that country a decade of economic malaise, but did it represent a failure of strategy or execution? There’s evidence that the spending did have a positive influence on the Japanese economy when it was pursued most vigorously, but it was too haphazard and too quickly abandoned to help Japan avert the worst of its Lost Decade.Display article as PDF for printing.
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