No, the Japanese Example Does Not Inform Our Situation

Amity Shlaes keeps trying to sell the idea that FDR made the Depression worse and that government spending to stimulate the economy is entirely bad. The historical record is mixed on this—the Second World War staved off a disaster in 1939 and some government spending, especially on defense and infrastructure, is necessary to grease the skids for American industry.  

Here, she draws a ridiculous comparison to Japan’s attempts to invest in infrastructure and stave off disaster after the collapse of the Nikkei in the late 1990s:

The spending yielded painfully little for the rest of the economy. The Nikkei stayed down. The country’s standard of living failed to keep pace with the rest of the world’s. The average Japanese’s purchasing power had been moving closer to that of the average American, Ronald Utt of the Heritage Foundation has noted. But in the 1990s the Japanese saw few advances. The gap between America and Japan widened again.

“The construction state is in some respects akin to the military-industrial complex in cold-war America (or the Soviet Union), sucking in the country’s wealth, consuming it inefficiently, growing like a cancer and bequeathing both fiscal crisis and environmental devastation,” commented Gavan McCormack, a professor at the Australian National University. The stimulus plans had the opposite effect of what was expected. Appalled at the country’s new deficits, Japanese consumers closed their wallets.

Worst, though, was the failure on jobs. Unemployment fell in many nations in the 1990s. In Japan, the ’90s were a lost decade: The unemployment rate more than doubled and surpassed the U.S. rate — an unthinkable occurrence just a few years earlier.

Even today, Japan is having trouble climbing out of its cement pit. At its high, in the mid-1990s, infrastructure spending accounted for 6 percent of its gross domestic product, double what the United States allocated for infrastructure in the ’90s and still higher than what politicians are considering spending today. In estimates of national debt, the world’s second-largest national economy is near the top of the list, perched between Lebanon and Jamaica. Last year, Japan’s public debt was far greater than the size of its economy, a burden that makes its demographic challenges more difficult to address.

What lessons should the United States take away? It is wrong to assume that construction will guarantee a two-fer for the economy — shining structures and redemptive growth. The private sector is often better than politicians at guessing what the market needs. And infrastructure projects demand so much political energy that there’s too little energy left over for everything else. Congress might want to remember all this as it debates infrastructure funding in the coming months. An edifice complex seems more likely to petrify a country than to move it forward.

Now, there’s nothing there worth debating, really. Japan’s economic collapse was due to an asset price bubble that lasted for practically the entire decade of the 1990s. The situation that the US faces is entirely dissimilar and is driven largely by credit default swaps. It is true that American “assets” became overpriced for a time, but not to the extent of Japan’s and so our “bubble” became more driven by the massive reselling of packaged debt than it did the actual prices of US homes.

Shlaes wants to argue that Japan was wrong to invest in infrastructure and that the government wasted money—sound like Ronald Reagan on acid to you? If so, you’re not alone. There’s no question that infrastructure needs to be improved in this country. In Japan, a much smaller country with a radically different style of infrastructure, the investments didn’t so much as solve their economic problems as it laid the groundwork for better use of land and resources in Japan.

As for jobs, well, that’s a public policy debacle if there ever was one. By destroying labor unions and allowing companies to outsource and hire illegal immigrants, they all but guaranteed that the economic benefits of jobs created by infrastructure spending would keep many Americans out of the labor market. If we restore living wages and dedicate ourelves to building a repaired health care system, you will see the working class in this country begin to reach a point where they can send their kids to college, and they will do exactly that. That’s how you grow an economy AND build a larger middle class.

Schlaes is never going to understand America if she continues to hold partisan ideology over her eyes. You can’t go all-bad, all-good and try to pick one slice of ideology over the other.