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Friday, February 6, 2009

To Stimulate or Not

There has been a lot of discussion about the stimulus package. Some of it has been calm and some has been rather heated. The problem is, it is economics and we don't really know what works. There is the John Maynard Keynes school, which says the Central Government needs to intervene during recessions, to help pull the economy out of the recession or depression.

Then there is the theory that President Franklin D Roosevelt didn't so much help us out of the Great Depression as prolong it. This theory has been put forward by Amity Shlaes, in her book, The Forgotten Man:  A New History of the Great Depression. (Yes, I have read it and will blog about it in the near future.)

The New York Times had an article on Thursday that talks about Japan's expenditure of over $5 Trillion to stimulate their economy. The author of the article, Mr Martin Fackler, notes the thoughts of our Current Secretary of the Treasury, Mr Timothy F. Geithner. In the early days of the Japanese economic crisis, back in the early 1990s, Mr Geithner was a financial attache at the US Embassy in Tokyo.

The last line of the story is from a government official in a Japanese city that benefited from the Stimulus. This is a city with its own "Bridge to Nowhere."
“Roads and bridges are attractive, but they create jobs only during construction,” said Shunji Nakamura, chief of the city’s industrial policy section. “You need projects with good jobs that will last through a bad economy.”
Two things stand to me. One is that where the money is spent matters.
Japan’s experience also seems to argue for spending heavily to promote social development. A 1998 report by the Japan Institute for Local Government, a nonprofit policy research group, found that every 1 trillion yen, or about $11.2 billion, spent on social services like care for the elderly and monthly pension payments added 1.64 trillion yen in growth. Financing for schools and education delivered an even bigger boost of 1.74 trillion yen, the report found.

But every 1 trillion yen spent on infrastructure projects in the 1990s increased Japan’s gross domestic product, a measure of its overall economic size, by only 1.37 trillion yen, mainly by creating jobs and other improvements like reducing travel times.
The other thing is that economists are divided on the overall benefits of a stimulus.
Economists tend to divide into two camps on the question of Japan’s infrastructure spending: those, many of them Americans like Mr. Geithner, who think it did not go far enough; and those, many of them Japanese, who think it was a colossal waste.
The author catches the size of the Japanese stimulus.
In total, Japan spent $6.3 trillion on construction-related public investment between 1991 and September of last year, according to the Cabinet Office. The spending peaked in 1995 and remained high until the early 2000s, when it was cut amid growing concerns about ballooning budget deficits.
One might reasonably conclude that if we decide that a stimulus package is the way to go, the current package is too small. But, a big stimulus package will give us a national debt like Japan, which was recently at 180% of annual GDP. That is a feat that likely cannot be duplicated too frequently.

Regards  --  Cliff

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