Frank Shostak has written a nice article published on the Mises Institute’s website. He discusses Japan and its poor economic growth over the last couple of decades. In particular, Shostak points out that Japan’s central bank did not have a tight monetary policy, despite what many say. He concludes that Japan would have experienced greater economic growth had the Bank of Japan not had such a loose monetary policy with artificially low interest rates.
One thing that Shostak did not emphasize, which he has tended to in other writings, is the importance of spending. In this particular piece, Shostak focused on central bank policy.
This is a point that I try to continually make, especially when there is a raging debate about taxes and deficits. The best indicator of economic growth is overall government spending. Almost every dollar (or yen) spent by the government is a misallocation of resources in some way. Every dollar has to come from somewhere, whether it is taxes, inflation, or borrowing. The overall level of government spending is the best measure of the extent of misallocated resources.
Of course, governments would not be able to spend near as much if there were no central bank to buy government debt. A central bank with a fiat currency allows the government to spend far more than it otherwise would, unless the people of the country are willing to pay higher taxes.
As a side note, I am not saying that government spending is the only thing that matters. Obviously resources are distorted in different ways depending on how government spending is financed. And of course government regulations and government laws also make a huge difference in what is allowed to take place and the extent of a free market economy.
In Japan’s case, the overall government spending from the late 1980’s to recent times is not surprising. As a percent to GDP, it increased quite a bit. You can view several charts here. Here is a chart of Japan’s spending vs. the U.S. from 1984 to 2000. As you can see, Japan’s government really ramped up spending in the early 1990’s, yet the economy was struggling all through the 1990’s (the first lost decade). This goes against the philosophy of the Keynesians.
Japan has been more of a mixed bag over the last 25 years than people think. But for the big government guys to point to it as an example of a struggling economy due to a lack of government interference is ridiculous. As Shostak showed, the Bank of Japan had a loose monetary policy. And we can also see that government spending increased considerably during this time. According to Keynesian theory, the Japanese economy should have been booming.
The scary thing is that the Japanese central bank is creating new money out of thin air at a much more rapid pace now. It does make its past monetary policy look tame. This cannot be good for the future of the Japanese economy. Of course, when everything turns sour, the Keynesians will try to blame it on the government or central bank for not spending and inflating enough. It is never enough to them.
One interesting difference between the U.S. and Japan is that private investors have funded a large portion of the Japanese government debt, at least in the past. The U.S. government’s debt is largely funded by the Federal Reserve and by foreign governments and their central banks. I really have no idea why Japanese citizens are anxious to buy government debt at near zero interest rates. I don’t know if they think it is their patriotic duty or if they are just simply foolish investors. With the Japanese debt exploding, there will eventually be a day of reckoning and a lot of bond investors are going to get burned.
Right now, Japan is a perfect example of what not to do. The Japanese government and the central bank are adopting policies that are wrong for their economy. In fact, their policies are the exact opposite of what should be done to improve the economy.