During last night’s news conference, I noted that President Obama erronously cited Japan in the 1990s as an example of a government not acting in the face of economic crisis, when in reality the opposite is true. Now that the transcript is available, I thought I’d offer some more context. The question comes from Jennifer Loven of the AP:
Q Thank you, Mr. President. Earlier today in Indiana, you said something striking. You said that this nation could end up in a crisis without action that we would be unable to reverse. Can you talk about what you know or what you’re hearing that would lead you to say that our recession might be permanent, when others in our history have not? And do you think that you risk losing some credibility or even talking down the economy by using dire language like that?
THE PRESIDENT: No, no, no, no — I think that what I’ve said is what other economists have said across the political spectrum, which is that if you delay acting on an economy of this severity, then you potentially create a negative spiral that becomes much more difficult for us to get out of. We saw this happen in Japan in the 1990s, where they did not act boldly and swiftly enough, and as a consequence they suffered what was called the “lost decade” where essentially for the entire ’90s they did not see any significant economic growth.
But this was an odd example for him to use, since the reality is the exact opposite of what Obama suggests. The Japan experience actually is a prime example of the futility of using government spending to stimulate the economy.
That arch right-wing rag, the New York Times reported last week:
Japan’s rural areas have been paved over and filled in with roads, dams and other big infrastructure projects, the legacy of trillions of dollars spent to lift the economy from a severe downturn caused by the bursting of a real estate bubble in the late 1980s. During those nearly two decades, Japan accumulated the largest public debt in the developed world — totaling 180 percent of its $5.5 trillion economy — while failing to generate a convincing recovery….
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….
In the end, say economists, it was not public works but an expensive cleanup of the debt-ridden banking system, combined with growing exports to China and the United States, that brought a close to Japan’s Lost Decade. This has led many to conclude that spending did little more than sink Japan deeply into debt, leaving an enormous tax burden for future generations.
President Obama and liberal intellectuals continue to perpetuate the textbook Keynesian theory that increased government spending is the best way to revive the economy, but they do not cite one real-world historical example in which such policies have been successful, and they brush aside countless examples of such policies being an abject failure. Last night, Obama added a new twist by citing an example to make his point, when in reality the example undermines him. Either he’s ignorant of what happened in Japan, or he correctly thought he could slip one past an ignorant press corps. Neither possibility is encouraging.