Japan clings to the same Keynesian Policies that have Failed for over 20 Years

Posted by PITHOCRATES - December 30th, 2012

Week in Review

The fiscal cliff negotiations are all about deficit reduction.  The Right wants to do it with spending cuts.   The Left wants to do it with new taxes.  So they can spend more.  This is why they can’t reach an agreement.  The Right wants to reduce the deficit.  While the Left wants to increase spending.  For benefits.  For education.  For investments in Green Energy.  For infrastructure.  For economic stimulus.  Which will only increase the deficit.  So the Democrats are not exactly sincere when they talk about deficit reduction.  Which is why they can’t make a deal with the Republicans.  Who are serious when they talk about deficit reduction.

Another reason why the Democrats want to spend so much money is that they are Keynesians.  Who believe the government can bring an economy out of a recession with stimulus spending.  Despite that failing every time we’ve tried it.  In the United States in the Seventies.  Again during the Obama administration.  In the Eurozone.  In Asia.  Especially in Japan.  Where they’ve been trying to stimulate themselves out of a recession since their Lost Decade.  The Nineties (see Japan’s New Stimulus: The Race With China To The Bottom by Gordon G. Chang posted 12/30/2012 on Forbes).

The universal consensus is that the fall in manufacturing bolsters the case for Shinzo Abe’s plans to stimulate the economy.  The new prime minister is pursuing a broad-based program of shocking Japan out of its fourth contraction since the turn of the century.

First, Abe is going to prime the pump in a big way…

Second, Abe is going to push the yen down to help struggling exporters…

Third, the just-installed prime minister is leaning on the Bank of Japan to open up the taps…

Markets may love Abe’s stimulus solutions, but they are at best short-term fixes.  Tokyo, after all, has tried them all before with generally unsatisfactory results.  What Japan needs is not another paved-over riverbed—past spending programs have resulted in useless infrastructure—but structural reform to increase the country’s competitiveness.

Tokyo’s political elite, unfortunately, has got hooked on the false notion that governments can create enduring prosperity.  Two decades of recession and recession-like stagnation in Japan are proof that repeated government intervention in the economy does not in fact work.

If you keep trying to stimulate yourself out of a recession with Keynesian policies for over twenty years perhaps it’s time to give up on those failed policies.  Of course to do that may require some spending and tax cuts.  And you know how well that goes over with big government types.  It’s why the Americans can’t make a deal to avoid the fiscal cliff.  And why the Japanese are going to try more of the same failed policies of the past.

Another impetus for these bad policies decisions is what’s happening in China.  Whose economy is much younger than Japan’s economy.  So they don’t have years of failed Keynesian policies digging their economy into a deep hole.  And because of that they’re going to go big.  Their stimulus is going to include the building of cities.  And that’s what the Japanese see.  That, and the (one time) economic explosion of their export economy.  Something they once had in Japan.  And would love to have again.  So they are going to follow China’s lead.  Even though their economic expansion is pretty much at its end.

Although there has been a “recovery” beginning in October, it looks like the upturn is already running out of steam.  China’s technocrats know they’re in trouble: they are apparently planning to increase the central government’s planned deficit for 2013 by 41% to 1.2 trillion yuan ($192 billion).  At present, it is now slated to be only 850 billion yuan.  Much of the shortfall is going toward an urbanization push next year.  Last year, Beijing announced its intention to build 20 new cities a year in each of the following 20 years.

The two biggest economies in Asia are ailing at the same time, and both Beijing and Tokyo have decided that government intervention is the shortest path to long-term growth.  Neither government’s program, however, looks viable.  Unfortunately, both China and Japan are going down the wrong road at the same time.

This could help the U.S. economy.  If they enacted spending cuts for their deficit reduction they could cut tax rates to spur the economy along.  And make the U.S. competitiveness soar while Japan and China dig themselves into deeper holes.  But the Americans, being the foolish Keynesians they are, are going to follow the Japanese and the Chinese into economic stagnation.  And with President Obama’s reelection they will stay Keynesian.  Drive over the fiscal cliff.  And compete with the Japanese to see who can have more lost decades

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