Economic stimulus as narcotic

Economic stimulus as narcotic February 8, 2013

Some business teachers and managing consultants still use their yellowed notes about Japan’s economic success, but that is way out of date.  For decades, Japan’s economy has been in the doldrums.  Why?  And why hasn’t their economy ever bounced back?   Economics columnist Robert J. Samuelson says the problem is that Japan has relied on  government stimulus.  Which is basically the strategy our government wants to follow.

From Robert Samuelson: Japan’s self-defeating stimulus cycle – The Washington Post:

You may recall that, in the 1980s, Japan was widely anointed as the next economic superpower, displacing the United States. It’s been a long slide since. In the 1990s, the “bubble economy” of high stock and real estate prices burst. The stock market is roughly a quarter of its high. Land prices have tumbled to 1975 levels. Since 2000, economic growth has averaged less than 1 percent annually. Government debt has ballooned to 214 percent of the economy (gross national product), about double the level of most advanced countries. Some superpower.

To get the economy moving, Abe has proposed a “stimulus” package of 10.3 trillion yen ($114 billion), about 2.2 percent of gross domestic product (GDP), and pushed the Bank of Japan (BOJ) — Japan’s Federal Reserve — to ease credit. This is familiar stuff. For years, Japanese governments have adopted stimulus plans. Since 1995, budget deficits have averaged 6 percent of GDP; that’s why debt (all past deficits) has exploded. The BOJ has repeatedly eased credit. In 1999, it cut short-term rates to near zero. It has had two episodes of “quantitative easing” — pumping more money into the economy — one from 2001 to 2006, the other from 2009 to now.

None of this has restored Japan’s glory days. . . .

“Japan’s [economic] dynamism was exaggerated,” says economist Adam Posen of the Peterson Institute. “In the 1980s, people focused on a few great companies and ignored how much of Japanese business was relatively backward.” Japan’s domestic-based businesses (retailing, distribution, food production and health care, among others) have not powered the economy the way exports did.

Stimulus policies have been the substitute.  To combat deep recessions, they’re justified; President Obama’s 2009 stimulus was warranted. But stimulus is supposed to be temporary. It’s supposed to “jump-start the economy.” Expansion becomes self-sustaining. In Japan, this transition never really occurred. . . .

The lesson is that huge budget deficits and ultra-low interest rates — the basics of stimulus — have limits and can be self-defeating. To use a well-worn metaphor: Stimulus becomes a narcotic. People feel better for a while, but the effect wears off. The economy then needs a new fix. Too many fixes may spawn new problems (examples: excessive debt, asset “bubbles,” inflation). That’s already happened in Japan. It’s caught in a trap. On the one hand, it needs stimulus to grow. On the other, the debt from past stimulus measures threatens future growth.

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  • OK, King Ludwig of Bavaria tried stimulus by building Neuschwanstein, Herrenchiemsee, and it ended with Prussian rule of Bavaria.
    The Weimar Republik and a host of other nations tried it from the 1920s to the 1960s, ending in disaster.
    Roosevelt tried it, and made a recession into the Great Depression.
    Obama’s trying it, and he’s coming close to what Roosevelt did.

    Maybe it’s time to reconsider the Keynesian hypothesis that government spending can do more than private spending to revive an economy. Maybe billions for bankrupt solar companies (that just happened to be bundlers for Obama’s campaigns) and glorified golf carts isn’t going to do the trick.

  • DonS

    Japan also has an extremely aged population:

    Coupled with its lack of natural resources, it is hard to see how it can ever pull itself out of the debt cycle it is in. Keynesian stimulus is an appropriate remedy if a government is usually in budget surplus and uses that surplus to stimulate a recessionary economy. However, when a government chronically runs a significant deficit, already borrowing prosperity from future generations, spiking that borrowing in an effort to stimulate the current economy is just putting a greater burden on our kids. It’s nonsense and it’s immoral.

  • fjsteve

    Yes, no kids and no immigration means little chance for a significant long-term recovery. Ironically, the push to get people employed means getting more women working more hours, which means they have even less kids.

  • tODD

    Bike (@1), Neuschwanstein was paid for out of the king’s personal fortune, not from public funds. It’s also not clear why you think the building of those castles led to Prussian rule. Ludwig II himself had suggested that Wilhelm be proclaimed emperor of the German Empire. What is your theory here?

  • Steve Billingsley

    DonS @ 2
    Yep, the typical Keynesian boilerplate is that you cut taxes and raise spending (stimulative) in a downturn and raise taxes and cut spending in times of surplus. Nowhere is the suggestion ever made to raise taxes and raise spending at the same time.
    Politicians are pretty good at selling tax cuts and at stimulus spending. Not so much on the other.

  • DonS

    Steve @ 5: Yeah, that too. But that tactic — raising taxes and stimulating at the same time — is really just redistribution sold to an illiterate public as Keynesian-ism.

  • sg


  • sg

    Economic Stimulus as Narcotic

    Economic Stimulus as Placebo

    Economic Stimulus as Palliative.

  • sg

    This NYTimes article cites the census as finding, “In multiple ways, Mrs. Maez is the face of stay-at-home motherhood in America, where 65 percent of married women who stay home with children under 18 years old live in households that earn less than $75,000 a year, according to the most recent data from the United States Census Bureau.”

    Maybe the gov’t does prefer these women work more and have fewer kids. Still, at 65% are they are underrepresented as stay home moms because 95% of households have income of $75,000 or less? I don’t know what percent of married couples with children have a household income over $75K. But in the top two income quintiles, the median number of household incomes is two and only 5.8% of married households are in poverty.

  • sg

    Neuschwanstein was paid for out of the king’s personal fortune, not from public funds.

    Okay, so his personal fortune came from somewhere. Taxes? I don’t know, but still his spending it on building a castle distributed it to the workers who then spent it, etc., so it would be stimulus. The problem is that he spent it on something that didn’t need to be done. If he had spent it on public goods like roads or training more doctors then, I think it would have been better stimulus. If he had paid them to dig holes and refill them, it would have been stimulative in the short term, but the work itself wouldn’t help anyone. It is not that stimulus is absolutely bad or good, rather that it makes a difference what it is spent on.