Japans' Economic Crisis.....................
Japanese Economic Crisis
New Deal Mythology
by George Melloan
Japan has just embarked on yet another "stimulus" program, its seventh in the eight years since its financial bubble began to deflate. A slumping economy makes it obvious that the previous six have failed in their purpose. The latest, valued at some $127 billion, is not much different from those that have gone before, with the exception that it contains a temporary, and thus probably ineffectual, tax cut. Its advent has done little to relieve Japan's gloom.
Treasury Secretary Robert Rubin has called the package "positive," while at the same time saying vaguely that "more is needed," thus keeping his options open. Secretary of State Madeleine Albright probably will try to be as nice about the economic program as possible when she arrives in Tokyo today. The two can hardly criticize Japan's belief in public spending as a stimulus when their own president came into office with a similar nostrum in mind, vowing to allot large amounts of public money on "infrastructure." He would have done it too, had not Congress tightened his leash.
Japanese Prime Minister Ryutaro Hashimoto and Bill Clinton are soul brothers in their certainty that government spending is a rejuvenating elixir. This belief derives, in part, from a mythology about the American experience of the 1930s--largely concocted by New Deal historians--which holds that public spending ended the Great Depression.
It did not. Actually, it was one of Mr. Hashimoto's predecessors, Hideki Tojo, who achieved that result by attacking Pearl Harbor and forcing the U.S. into a massive war effort. Up until then, Franklin Delano Roosevelt's resuscitation efforts had had only limited success. After some recovery in the mid-1930s, the economy had slumped again in 1938. As late as 1939 there still were nine million Americans out of work. That was less appalling than the 13 million of 1933, but it still was 17.2% of the work force.
The most reliable accounts say that FDR was no Keynesian; he saw massive public works spending as relief for the jobless, not primarily as an economic stimulus. Joblessness, of course, is not Japan's problem--at least not yet. FDR also was far more concerned about the economic risks of deficit spending and rising public debt than Mr. Hashimoto appears to be.
The distinctions are important because of certain similarities between Japan's current funk and America's economic collapse of the 1930s. Although both had complex origins, each began with stock market crashes that had destructive effects on the banking sector. U.S. banks had loaned heavily for stock and real estate speculation and were devastated when some $30 billion in paper values evaporated in a matter of weeks in 1929. (A billion dollars was lot of money then.) In early 1932, Herbert Hoover tried to bail out the banks with his Reconstruction Finance Corp. (RFC) but it proved inadequate to the task. By the time FDR took office, a pronounced deflation had set in, the banking system was tottering, and depositors were demanding their money. FDR dictated a "bank holiday," closing banks until Congress could enact measures to reassure depositors. With the lifeblood of business and industry shut off, the economy plunged into deep Depression.
Japan has experienced a similar, though less destructive, sequence: the central bank-financed speculative bubble in stock and real estate of the late 1980s; the collapse of 1990; the resulting loss of liquidity, leading to deflation; the efforts of the Ministry of Finance (Tokyo's equivalent of the RFC) to keep the banks afloat--and now stagnation. Some banks probably are insolvent. Others are reluctant to lend because added lending pushes their risk-based capital-to-loan ratios below the 8% "Basel standard" for international banks. They are relatively unresponsive to monetary stimulus by the central bank. Hence, a credit crunch.
FDR, faced with a far worse situation, turned on the federal spending spigots, just as Mr. Hashimoto has. In the famous first 100 days of his administration, he and a like-minded Congress spewed out alphabet agencies and financed them generously from tax revenues and federal borrowing. The Public Works Administration took on the kinds of tasks that Japan's Construction Ministry is undertaking today, building roads, bridges and public buildings. The main difference is that the U.S. needed roads, bridges and public buildings at the time, so the projects, although often inefficiently executed, filled some real needs. It's highly doubtful that Japan needs further spending on new roads and bridges that parallel little-used existing ones. Japan is costing itself growth and jobs on balance by robbing money from potentially productive uses to spend it on make-work projects.
FDR, however, was never very successful in energizing the American private sector, which is where all the potential for economic muscle existed, as the war effort and later economic development would prove. According to John Chamberlain's excellent "The Enterprising Americans," first published in 1961, domestic investment fell to $900 million in 1932 from $16 billion in 1929 on Hoover's watch, then under FDR climbed to $11.7 billion in 1937, but collapsed again to $6.7 billion in 1938.
One reason was that FDR's experimentation in state economic management sapped business confidence. His early National Recovery Administration, with its price fixing and cartelization, bordered on fascism, which was admired by some New Dealers of the time. Fortunately, the Supreme Court declared its core provisions unconstitutional. Some other innovations of the New Deal, such as Social Security and the Securities and Exchange Commission, were more praiseworthy and have lasted. But they were no engine for economic growth.
Clearly, the New Deal is no useful model for Japan. Roosevelt was a bold experimenter, and that was both his strength and weakness. His programs had political power and indeed revolutionized American politics. That's why they have appeal for politicians seeking to expand or consolidate their influence. But the revival of the U.S. consumer economy didn't hit its stride until the 1950s, when most of the New Deal's central economic management schemes had been scrapped. Mr. Hashimoto should look to the return of the U.S. market economy in the 1950s if he wants a model for reviving Japan's economic growth.
The Wall Street Journal, April 28, 1998 |
