Big Spending And Long Slumps
Economy: Before forging ahead to a new New Deal — without the dams — President Obama should ponder the poor record of big-government stimulus plans, starting with Japan in the 1990s.
When times are tough, politicians talk infrastructure. That’s what the president-elect is doing now, and there are powerful political reasons for doing so.
Spending on public works will always be popular with the people who get the jobs and the money for local economies where the work takes place. The public also likes seeing its tax dollars “at work,” as the signs say, on tangible benefits like roads and bridges.
And it’s just common sense the economy can’t thrive without modern, high-capacity roads, rail lines, seaports, electric power, aqueducts, reservoirs, natural-gas lines, the Internet and all the other things that help the private sector produce goods and services.
But the big question right now is how to get a stricken economy moving again, and infrastructure spending is not the answer.
Critics have already noted an obvious problem of timing. Even a crash public-works program will take a while to reach the point where people are put to work on construction sites or in factories.
And don’t forget the greens. Obama certainly can’t. The environmental movement has never let the health of the economy get in its way, and there’s no reason to believe it has changed its ways.
This isn’t the 1930s, when the federal government altered much of the American landscape with massive reclamation projects. A New Deal today would have no dams — and, if the enviros get their way, it would lack new highways and anything to do with nuclear power.
Figure politics to get in the mix when the government spends money, even if it claims to have only economics in mind.
In the marketplace, money naturally gravitates toward real needs, signaled by the willingness of people to pay for goods and services out of their own pockets.
In government spending, money follows power. It is channeled by key officeholders to favored constituencies. So when a national government tries to breathe life into an economy with massive spending, the result is massive economic inefficiency.
It’s an undying Democratic Party myth that Franklin Roosevelt’s New Deal spending helped end the Great Depression (or at least relieved suffering). The hard fact is that unemployment stayed well into the double digits until the early stages of World War II.
There seems less argument over a more recent case of failed big-government stimulus, that of Japan in the 1990s. The incoming administration should study that lost decade well, because it started with disturbing parallels to our own time and place.
Japan got into trouble with the collapse of a real-estate bubble and a subsequent breakdown of its banking system.
The Japanese government made one mistake that U.S. policymakers are at least trying to avoid now: It did not move aggressively to clean up the bad debt on banks’ balance sheets.
Then it made another error that the pending Obama administration seems tempted to repeat. It tried to revive the economy by increasing the government’s share of it.
The result was plenty of pork and almost no growth. Japanese government spending (at all levels) grew from 31% during the ’90s to 38% of GDP more recently.
Meanwhile, average Japanese annual economic growth fell from 4.1% in the ’80s to just 1% in the ’90s. From ’92 to ’99, industrial output grew only 0.7% compared with nearly 40% in the U.S., which spent the decade reducing government spending as a share of GDP (this was the era of a GOP Congress that took its job seriously).
There’s a cautionary tale here for Barack Obama, but also a reminder that he has a choice. The current crisis is serious enough to excuse, even demand, changes in positions he had staked out during much different conditions on the campaign trail.
He also can find precedent for sound policy in his own party’s history. FDR is not his only model in the Democrat pantheon. He should take his cue in this case from a liberal with whom he is often compared, John Kennedy, who chose tax cuts as a way to spur growth by freeing up private capital.
Members of Obama’s party, along with his own ideas on tax “fairness,” will be pushing him toward the slow lane of big spending. As JFK knew, there’s a better way.