It's time for Japan to dump the failed Keynesian policies
Decades of monetary stimulus have merely inflated state debt and done little to help nation
Let's look at failure. Since the early 1990s, the Japanese government has tried to stimulate economic growth with heavy doses of easy money and fiscal deficits.
It is what they call the Keynesian model although I am not sure that John Maynard Keynes would have subscribed to all of it. Briefly stated, it says that in bad times you open the money taps and also have your government go on a big spending spree. This will bring good times back.
And this is what Japan did. For the past 20 years, the central bank discount rate has been less than 1 per cent and the short-term lending rate less than 2 per cent. As the first chart shows, over the same period government debt has also risen from 55 to 215 per cent of gross domestic product.
The debt figure now stands at 1,040 trillion yen. Help me here. What is a thousand trillion? A zillion? A gigajillion? Has anyone ever been there before?
But a bigger question intrudes. What results has this Keynesian largesse brought?
Answer: over the past 20 years the Japanese economy has achieved a compound annual growth rate per capita of seven-tenths of 1 per cent and now has just sunk back into recession. That is a failing grade on the economic report card.
And, as the second chart shows, the massive stimulus measures have so notably under-stimulated the economy that the total value of loans and discounted bills in the Japanese banking system has actually declined over the period.
So if you want to play doctor and fix things, one lesson obviously stands out like the proverbial sore thumb as you review this woeful record. Let's not do it again, you tell yourself. We had better try something new.
But what has Shinzo Abe just said? Here it is - "Let's do this again. I can't think of anything new to do."
Here is the big flaw at the heart of Keynesian thinking about easy money. It is simple. You can lead a horse to water but you cannot make it drink. You can offer investors all the money you have, but if they see no prospect of investing it profitably, then they will not take it. In Japan, they will not take it.
Likewise, any time you spend money, you create jobs. When the government does it with your money, then it creates more jobs and you create fewer because you have less money to spend. The net gain of the government doing it is zero. In fact, it is less than zero as the government invariably creates less productive jobs than the market does if left to itself.
Yes, there is another option, Mr Abe. It is the one your grandmother taught you - be careful how you spend your money and do not go into debt unless you have to.
