If you've been reading the Keyenesians during this recession, you know they've been pushing for another, even larger stimulus package to jumpstart the economy. They point to Japan's "Lost Decade" as a warning as they promote the idea that if only the Japanese had increased their stimulus spending, they could have avoided it.
As Robert Samuelson points out in his column today, that's utter nonsense:
Just the opposite is true: Japan's economic eclipse shows the limited power of economic stimulus and the exaggerated threat of modest deflation. There is no substitute for vigorous private-sector job creation and investment, and that's been missing in Japan. This is a lesson we should heed.
Japan's economic problems, like ours, originated in huge asset "bubbles." From 1985 to 1989, Japan's stock market tripled. Land prices in major cities tripled by 1991. The crash was brutal. By year-end 1992, stocks had dropped 57 percent from 1989. Land prices fell in 1992 and proceeded steadily downward; they are now at early 1980s' levels. Wealth shrank. Banks - having lent on the collateral of inflated land values - weakened. Some became insolvent. The economy sputtered. It grew about 1.5 percent annually in the 1990s, down from 4.4 percent in the 1980s.
Despite massive stimulus, rapid growth hasn't resumed two decades later. Although the Japanese reacted slowly, they adopted the advice of economics textbooks. They raised spending, cut taxes and let budget deficits balloon. Gross government debt soared from 63 percent of the economy (gross domestic product) in 1991 to 101 percent of GDP by 1997. It's now around 200 percent. The Bank of Japan (their Federal Reserve) cut interest rates, going to zero in 1999 - a policy that, with some slight interruptions, endures.
Stimulus money as a cure all is a myth. Certainly, some stim money during a downturn can help - as long as it is limited, targeted, and part of an overall plan to increase economic activity. But the kind of stimulus being pushed by "experts" like Paul Krugman is frightening. Massively adding to our debt would only make the problems worse, and the long term solutions even harder to address.
One "Lost Decade" is enough, thank you.