The Voice of Young Conservatives Blog

Japan is known for placing a high value on education and technological innovation. They are the home of such worldwide brands as Fuji, Sony, Panasonic, Toshiba, Toyota, Honda, Mitsubishi, and Nintendo just to name a few. Yet despite an incredible corporate history their nation is struggling. If we continue down the same policy path the United States will follow a similarly stagnant path.

Japan’s problems began in 1990s which came to be known as “The Lost Decade.” The 80s were a time of incredible prosperity. Interest rates were low, research and development was booming, and real estate prices were zooming skyward. Then the bubble burst. Stock prices crumbled and real estate fell through the floor, spraying banks’ ledgers with red ink. Credit dried up, investment plummeted, and public consumption of goods shriveled.

The problem should sound very similar, but how about the responses?

Japan’s response was an utter disaster. A series of governmental missteps that perpetuated rather than solved the crisis. First, they attempted three major fiscal stimulus packages totaling 6 percent of GDP (by comparison ours was around 5.7%). They were remarkably unsuccessful, with economic growth barely topping 1 percent following the government stimulus.

Why were they so unsuccessful? As the American Enterprise Institute explains, “the packages were poorly directed–largely toward unproductive public works projects and credits to small businesses that were no longer economically viable.” The government also bailed out many large companies in an attempt to keep the economy liquid. But many of these companies were only surviving because of the constant drip of government funds. When the fresh funds stopped the firms collapsed.  But their largest policy mistake was raising taxes in an attempt to make up for the enormous government debt caused by their earlier trials with stimulus. The higher taxes, especially the increase in the consumption tax (VAT), led to a further reduction in available investment capital and worsened their economic downturn.

Nevertheless, here we stand, our government having followed almost step-by-step the failed Japanese model.

Poorly targeted stimulus heavily reliant on public sector projects? Check.

Disregarding free markets and creating a moral hazard with “too big to fail” policies? Check.

Enormous government stimulus package followed by looming tax increases? Check.

Pointing out the failures of government policy doesn’t do much good, so what could we have done differently? Although I don’t dare attempt to create an entire policy prescription, here are some lessons I learned from studying Japan’s Lost Decade.

First, the government should extricate itself from the folly of stimulus. Federal governments have proved inept at accurately targeted where money needs to be injected into the economy. Instead, stimulus creates unnatural disruptions in the economy, the result of money not going where it is needed most. Our huge monetary investment left us with very little to show for it other than enormous debt.

Second, despite the increased deficit, the government must resist the temptation to raise taxes. The reckless spending has led to historic levels of debt and deficit which has naturally spooked many consumers and businesses. They are rightly afraid that the government will eventually be forced to course-correct, but rather than do so with spending cuts, will increase taxes. Such uncertainty compounds the economic problems we face. To avoid the same contraction in investment as Japan President Obama should immediately renounce his plan to raise tax rates on business profits, dividends and capital gains. These will act as marginal tax increases on the very capital the Federal Reserve has been struggling to make liquid over the last two years.

Third, avoid deflation at all costs. Japan fell into a deflationary spiral in which consumers had a continual incentive to delay purchases as real prices continued to fall. In a deflationary economy businesses also have little reason to invest since simply sitting on cash becomes a great investment. So as consumer demand and private investment falls, so to does economic growth, thus exacerbating the deflationary crisis. To avoid this the federal government should rescind any unspent stimulus funds towards a policy of quantitative easing. This is a process in which the Federal Reserve increases the supply of money by buying up financial assets – the most helpful in our case being money-backed securities and corporate bonds. Such a process fights the threat of deflation with the benefit of increasing banks ability to lend rather than mire itself in underperforming stimulus projects.

History is about learning lessons. Japan and the United States share a heritage of innovation, hard work, and entrepreneurship. How sad it would be if we also share in their economic woes as a result of Washington’s stubbornness.

by Brandon Greife, Political Director