Do we need a second fiscal stimulus? Lessons from Japan

Posted by: Peter Coy on July 07

Guest blog from Economics Editor Peter Coy

Two excerpts from an article I wrote for BusinessWeek that ran online on Jan. 7, 2009, called “What the U.S. Can Learn From Japan’s Lost Decade.”

Fiscal conservatives in the U.S. worry about huge deficits, but one lesson from Japan is that halfway recovery measures lead to years of subpar growth that make deficits even bigger. …

As big as it seems, Obama’s stimulus is likely to be just a down payment.

Sure enough, the first stimulus is looking insufficient. And sure enough, fiscal conservatives are complaining that the government has already done too much. Obama Administration adviser Laura Tyson is taking heat for an overnight speech in Singapore in which she went beyond other administration officials in saying that a second fiscal stimulus should at least be prepared as a contingency.

One lesson from Japan is the importance of intervening quickly and massively. If you let an economy sink too far, fiscal and monetary policy become less effective. Likewise, it’s easier to save a patient who has lost a pint of blood than one who has lost a gallon.

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Reader Comments

Steve

July 7, 2009 02:32 PM

How long are we going to allow the government to "throw good money after bad" with our tax dollars? They don't have the money now and the want to spend even more? Even Mr. Coy suggests this is a good idea. A few years from now when mortgage rates are over 10% - 15% and only the wealthy can get credit cards (at 30% interest), some "experts" are going to ask how we got in this mess.

wily coyote

July 7, 2009 02:52 PM

By it's very nature fiscal policy can not ever be massive enough for free market economies. Government, as big as is it, is still too small. Monetary policy can be more effective but it's also hugely imprecise (Let's see, I want growth but not inflation...) Japan's experience should teach us two things 1) The PERCEPTION that the government is going in with both feet is important (JP didn't do this for the first 5 yrs or so of their Lost Decade) 2) Fiscal stimulus actually put them in a worse position (after a decade of intervention they racked up huge debt where they had none before and they STILL had a decade of deflation/no growth)
Both in concert is better than either of them separately but in the US that would mean the Central Bank would need to be run by the same guy as the Treasury like all the other G7 countries...

Keith G

July 7, 2009 03:12 PM

Peter,

What percentage of the current stimulus is spent? It seems early to me to claim the current stimulus is not enough. Also, how does the fact that Japan propped up businesses that should have died (so called zombies) factor into their lack of growth? What if they stimulated the wrong areas of their economy?

Roger Cole

July 7, 2009 03:23 PM

When looking at the Japan experience, it can be misleading to look at one facet of that experience in isolation.

One should also conclude that taxes should not be raised at a time of economic weakness and that zombie companies should not be maintained indefinitely in a state of undeadness, but instead should be allowed to go bankrupt, with healthier companies snapping up their assets and putting them to better use than they ever will.

One can also look at the generally abysmal record of economic stimuli, the much vaunted "New Deal" would be a good case in point and perhaps draw the general conclusion that they might be a good thing to avoid altogether.

Aquiring a knowledge of history avoids the need to make all those expensive mistakes again in order to learn (too late) from them.

LAO

July 7, 2009 03:26 PM

I wish that I could get a notion of how that lost decade looks from the inside, to the (non-financial) Japanese themselves. I do not have the sense that the people feel thrown to the wolves. To the chagrin of some, they actually do have homeless people, though it does not appear to approach the level of problem that it has persistently been in the U.S.

Politically, it appears that another stimulus would be almost impossible, unless we enter another phase of near economic free-fall. An economic reset might not be the worst thing unless the suffering continues to be somewhat arbitrarily brutal.

It seems to be that as a contingency, and even as a threat, a tentative stimulus proposal could serve a constructive purpose, but whether it would be wise to implement, I can't say -- I would want to see global sign on first.

johnd

July 7, 2009 03:49 PM

Japan's crisis actually has very little in common with the current crisis in the U.S. Japan's problems stemmed from being overly reliant on exports to the U.S. Eventually the Yen soared and put a massive squeeze on the economy. Deficit spending did nothing because Japan never adjusted structurally to rely on domestic sources of growth. Excess spending just produced some truly impressive white elephant construction projects. It would be stupid for the U.S. to follow that path. The U.S. economy is the most flexible in the world, and is rapidly restructuring to compete in the new economic environment. Soaking up precious investment dollars to finance hairbrained fiscal projects will only prolong the economy's natural path to renewed growth.

BusinessWeek Economics Editor Peter Coy

July 7, 2009 04:06 PM

Keith G,
You're right that a shockingly small portion of the first stimulus has been disbursed. Something like 10%. On the other hand, we can already tell that even if all of it were spent it wouldn't be enough. It was designed to fill a smaller hole.
As for the zombies--yes again. That compounded Japan's difficulties. The U.S. has done a better job of getting rid of excess capacity by putting companies like GM and Chrysler through bankruptcy.

James Raider

July 7, 2009 05:43 PM

Don’t look to China for a recue from this deepening recession. It’s not up to the challenge.

http://pacificgatepost.blogspot.com/2009/07/dont-believe-pundits-on-chinas-century.html

The world still waits on the American consumer.

Keith G

July 7, 2009 05:52 PM

If the rate of spending was increased would we have to spend less overall?

It seams that if we could get more out quicker we would reverse the losses sooner and therefore the 'hole' would not be as deep. I think faster would be more politically feasible than bigger.

Keith G

July 7, 2009 05:52 PM

If the rate of spending was increased would we have to spend less overall?

It seams that if we could get more out quicker we would reverse the losses sooner and therefore the 'hole' would not be as deep. I think faster would be more politically feasible than bigger.

Kasthuri N Ravilla

July 7, 2009 06:14 PM

Comparing the US and Japan does not cut ice for two reasons. (1) The US had neverever been an export oriented economy. (2) Japanese were workaholics. Both does not apply to the US. Japanese companies outsourced for exports and the US still outsources everything for deficit financing and internal consumption through aggressive immigration and outsourced manufacturing of American brands for internal consumption and profits for corporations. How did the author become an editor of an economics journnal, supposed to be prestigeous to boot? Will you ever find time, seriously, to discuss the jobs outsourced for deficit financing from the 1980s? If anything the US learnt efficiently from the Japanese, then it will be "harakiri" on economic front. The sword known as "profits for corporations" were used effectively to commit "harakiri" of sacrificing jobs of the prosperous America.

Doug

July 7, 2009 06:39 PM

A second federal stimulus is definitely needed, since the first federal stimulus has been and/or is in the process of being cancelled by the draconian cutbacks in state (e.g., California) and local government spending.

Mike Reardon

July 7, 2009 07:41 PM

Japan had one thing we never had, layers and layers of middle men in the industrial processes that added incremental effort in the movement to market. They had every transaction then pay across a wider and wider segment of employment, so keeping a unproductive business in place became really, unofficial welfare payment directly into the economy. It kept workers from being a direct dependency that was charged against the state. This was a time of great economic expansion into Japanese foreign investments, they offset a nation social policy that was never admitted to.

We need a real infrastructure investment that makes work and leaves real hardware on the ground to re-start new jobs in this country. Any stimulus should hit the ground before it goes into the pockets of banks.

Get the banks and finance people, with hands out for more greater rewards, out of real domestic investment. The fact is, no one admits to in the media, the banks are going out of their way choking any real investment by not lending to businesses that want to expand. Everyone I know who has gone for a loan has been put off at their local bank and are having their long standing accounts cut back.

Stimulus is needed as real Investments.

Back in 96 Newt Gingrich said that welfare had failed, Bill Clinton should do the right thing and put it out of its misery, that doing away with its waste was what we needed to do from here on out. Well Newt. from here out having Reaganomics and Bush tax cuts that only give rewards to the bankers and investor class, that only inflate more bubbles to gain greater rewards without investing in real domestic infrastructure, has proven to be a complete fail for the Nation. It never returned money to refill Government coffered did it. And now we have nothing to invest. Forget the failed Republican fix that only makes bankers richer, get work into this country first. Any real investment.

James Goode

July 7, 2009 07:47 PM

There is one overwhelming similarity between Japan's lost decade and the one we're surely entering now: their demographic age profile. The number of consumers in the crucial peak-spending age range of 45 - 50 fell off a cliff after 1989 in Japan, recovering only after 2003. We are on the cusp of a 20% drop in this age cohort not only in the US but across the western world, as a result of the ageing of the baby boom generation. You'll rarely hear demographic factors discussed by economists and politicians (mainly because the implications are deterministic and would make many of their theories and services redundant) but the effects are, and will continue to be, real enough.

There is now compelling practical as well as theoretical evidence that demographic forces were the primary driver of our tremendous economic expansion and, until around 2020 when the next large generation begins to move into its peak spending years, the western world's consumer tide will be going out. Government attempts to turn this tide, as evidenced by Japan, are doomed to fail.

viking

July 8, 2009 12:02 AM

One big difference between the US now and Japan in the 1990/1999 period is that they could tap an enormous pool of internal savings to finance the government deficit spending.We have no such savings pool and therefore will be forced to rely on foreigners to finance our deficit spending.This will mean that a bigger and bigger slice of the interest payment on government bonds will flow overseas and therefore not be available for domestic investments.Therefore think Argentina for comparison,not Japan and we all know what has happened to Argentina!!

cm

July 8, 2009 12:36 AM

Mike Reardon: There is probably some truth to that, but I have read that in the last decade or so (perhaps coincident with the 90's Asian crisis?) the Japanese "social contract" of "big family employers" for corporate men has been weakened considerably, from both sides -- employers using bully tactics that would definitely be considered "constructive discharge" in the US, and also esp. the younger generation of workers displaying less inclination to essentially commit their life to a corporation (on which they cannot rely to reciprocate?).

Similar thing in the US and Western Europe -- prime employers slashing corporate pensions and engaging in hire/fire (at all levels, though in upper management the velvet gloves are still on with years long gardening leaves and "special assignments", but hire/fire nonetheless), and workers responding with "disloyalty" and job hopping.

cm

July 8, 2009 12:44 AM

James G: I agree with the general thesis, but it seems to me there is the additional element of age discrimination in many professions, which may not be a new phenomenon, but is perhaps gaining significance with the 40+ cohort(s) being particularly large. Aside from demographic effects, there seems to be a separate transition from "lifelong" employment followed by retirement to employment into the 40's (?) followed by a 20-some years lull of un(der)employment. Then again, that may largely be a demographic effect in that the 40+ cohorts are larger than the economy can absorb at least in our currently practiced economic/business/social paradigms.

OTOH with the recent (late 90's onwards) offshoring the demographics go global -- lots of younger people in offshore locations that employers prefer (regardless of experience levels apparently).

cm

July 8, 2009 12:50 AM

Viking: Financing is only a mechanism. The question is, are US governments (federal/state) prepared and in a position of power to commission the work that private industry wouldn't (domestically)? Some previous commenters have hinted what traction mechanisms e.g. Japan used.

At face value, there is little that would stop the government from investing in science/research/tech and infrastructure, aside from power structures holding the legislative and executive hostage, and the ideological limitations of government official themselves.

Nick in Kyoto

July 8, 2009 05:05 AM

Before we conclude that Japan and the US do not resemble each other, consider the following:

1. From 1989-91 Japan's massive property bubble and stock market bubble burst. A powerful negative wealth effect ensued.

2. Consumers hunkered down, and business cut capex. They continue to do so nearly 20 years later.

3. Unemployment rose to post-War highs, while "hidden unemployment" skyrocketed.

4. A year after the bubble burst, Japan began its first of five forays to fix its banking system.

5. Yen interest rates were cut to zero. Bond yields plunged. And in the early 90s, everyone most economists feared "eventual" inflation (even hyperinflation) due to all the money washing about. Yet, deflation was the only actual economic reality.

6. Government embarked upon its first major round of fiscal spending in late '91. The conservatives in Japan's LDP were deeply worried about the long term effects of Keynesian measures on Japan's budget deficit.

7. A start-stop process of spending and taxing has continued to play out for 18 years.

8. More radical measures, such as taking over major banks, took years.

9. Zombie firms corroded entire industries.

10. Throughout this period the yen remained fairly stable. The yen rose from 360 to 120 in the 70s and 80s. But it stayed between 145 and 80 since the bubble burst.

11. Real estate has yet to bottom. Prices in central Tokyo turned up 2 years after the bubble in what was the first of many false bottoms.

12. In 1991 the Nikkei experienced a 50% rally. Many commentators, as well as domestic and foreign investors confidently predicted the bottom. Yet 17 years later the stock market today is 75% below its 1989 high.

13. Optimism and "animal spirits" were not extinguished until early 2000. Soon after the bubble burst, companies continued to predict all would come back. (Many still behave this way.)

14. Japan's famous three excesses are excess labor, excess capacity, and excess debt. The three are back with a vengence.

15. Japan's long-term fiscal situation is in deep peril due to the aging of society and rising health care and retirement costs. This creates a powerful "Ricordian Equivalence" effect which limits the effectiveness of more pump priming.

Sound familiar?


Nick in Kyoto

Nick in Kyoto

July 8, 2009 05:06 AM

Before we conclude that Japan and the US do not resemble each other, consider the following:

1. From 1989-91 Japan's massive property bubble and stock market bubble burst. A powerful negative wealth effect ensued.

2. Consumers hunkered down, and business cut capex. They continue to do so nearly 20 years later.

3. Unemployment rose to post-War highs, while "hidden unemployment" skyrocketed.

4. A year after the bubble burst, Japan began its first of five forays to fix its banking system.

5. Yen interest rates were cut to zero. Bond yields plunged. And in the early 90s, everyone most economists feared "eventual" inflation (even hyperinflation) due to all the money washing about. Yet, deflation was the only actual economic reality.

6. Government embarked upon its first major round of fiscal spending in late '91. The conservatives in Japan's LDP were deeply worried about the long term effects of Keynesian measures on Japan's budget deficit.

7. A start-stop process of spending and taxing has continued to play out for 18 years.

8. More radical measures, such as taking over major banks, took years.

9. Zombie firms corroded entire industries.

10. Throughout this period the yen remained fairly stable. The yen rose from 360 to 120 in the 70s and 80s. But it stayed between 145 and 80 since the bubble burst.

11. Real estate has yet to bottom. Prices in central Tokyo turned up 2 years after the bubble in what was the first of many false bottoms.

12. In 1991 the Nikkei experienced a 50% rally. Many commentators, as well as domestic and foreign investors confidently predicted the bottom. Yet 17 years later the stock market today is 75% below its 1989 high.

13. Optimism and "animal spirits" were not extinguished until early 2000. Soon after the bubble burst, companies continued to predict all would come back. (Many still behave this way.)

14. Japan's famous three excesses are excess labor, excess capacity, and excess debt. The three are back with a vengence.

15. Japan's long-term fiscal situation is in deep peril due to the aging of society and rising health care and retirement costs. This creates a powerful "Ricordian Equivalence" effect which limits the effectiveness of more pump priming.

Sound familiar?


Nick in Kyoto

Beezer

July 8, 2009 11:58 AM

Interesting comparisons between us and Japan, which had the notorious "lost decade."

We've already had our own lost decade, have we not? No job growth since 2000.
Bank profits built up the past 10 years were evaporated--and then some. Ten percent loss of income for the bottom 80% of Americans, adjusted for inflation, since 1970 (that's what? four lost decades!). Not lost for the top 20%, however, their income increased 60% over that time frame.

I'd say that whatever is bedeviling our economy has been there for a long, long time.

MBK

July 8, 2009 03:57 PM

Cut taxes, surcharges, and fees. All taxes, surcharges, and fees!

soon

July 8, 2009 07:45 PM

Japan has US$15 trillion of domestic savings for the government to draw on. US has little household savings but much debts. Generally, Japanese throughout the last twenty "lost" years were living well and socially peacefully though bad for financial investors. US troubles are a lot deeper and more serious as households, businesses and government are all over indebted. No point incurring more deficits to further enrich fat-cat bankers at the expense of future generations. Deficits should be spent only on infrastructure. Live within means is the only long-term solution at family, business and government levels. There is no short-cut in life.

James Goode

July 9, 2009 06:11 PM

Cm: it would be interesting to see the figures and try to determine if the long-term trend in major economies is indeed for employers to ditch experience in favour of youth or whether it's more of a temporary phenomenon. Since stats (and common sense) show that productivity increases markedly with experience and peaks well into middle age, there surely has to be a limit to how dumb employers can get - but it will be fascinating to see. There is surely going to be a major battle fought in coming years between younger and older workers for a far more limited pool of full-time work (I'm betting on a jobless recovery folks). The boomers are vast in number and the bulk of them are now moving into their 50s+. Now that their savings, pensions and property prices have taken a hammering I don't think they'll be too happy about making way too soon for their younger upstarts! Let's also not forget the pension and welfare implications of this demographic tidal wave for our taxes and government spending, a timebomb both politicians and public have yet to face up to.

In this respect and in the many listed by Nick in Kyoto above it seems to me that Japan is very much our template for what's to come; but here's one sobering piece of perspective to give us pause: in the 90's, pretty much the only reason Japan avoided a full-scale depression was because it had a booming world economy to export into.

'Nuff said?

cm

July 9, 2009 09:02 PM

James G: "there surely has to be a limit to how dumb employers can get" - based on what? I cannot follow your reasoning.

On a more serious note, I have commented on the matter in the "older worker crowding out younger ones" thread and I don't want to repeat myself much here.

Judging by admittedly rather flimsy evidence, I'm of the opinion that age discrimination is most prevalent in the occupations and job functions where it is thought that "motivation" and expectations of "career growth" are major "performance drivers". Based on my experience particularly with "tech", one contributor to age discrimination besides healthcare costs, pay scales, and "obsolescence" stereotypes seems to be that with age/experience (and related disillusionment) this "performance management" tool set becomes ineffective.

Emo

July 11, 2009 12:04 AM

""Also, how does the fact that Japan propped up businesses that should have died (so called zombies) factor into their lack of growth?""

What would you call GM, AIG and Chrysler?

Japanese consumers were not heavily in debt when their bubble burst.

""Back in 96 Newt Gingrich said that welfare had failed, Bill Clinton should do the right thing and put it out of its misery""


Newt was right and Bill Clinton signed probably one of the best pieces of post WW2 legislation ever. During the 2001 recession poverty rates barely nudged as unemployment rose. Now Obama has repealed welfare reform. Watch misery skyrocket.

Mike Reardon, your entire post is a giant nonsequitor

emo

July 11, 2009 12:06 AM

yes

Thank you for your interest. This blog is no longer active.

 

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Michael Mandel, BW's award-winning chief economist, provides his unique perspective on the hot economic issues of the day. From globalization to the future of work to the ups and downs of the financial markets, Mandel-named 2006 economic journalist of the year by the World Leadership Forum-offers cutting edge analysis and commentary.

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