What can we learn from the experience of the Japanese who faced the collapse of their own massive real estate bubble in the late 80s? The New York Times describes positive and negative results of massive government spending.
In a nutshell, Japan’s experience suggests that infrastructure spending, while a blunt instrument, can help revive a developed economy, say many economists and one very important American official: Treasury Secretary Timothy F. Geithner, who was a young financial attaché in Japan during the collapse and subsequent doldrums. One lesson Mr. Geithner has said he took away from that experience is that spending must come in quick, massive doses, and be continued until recovery takes firm root.
Moreover, it matters what gets built: Japan spent too much on increasingly wasteful roads and bridges, and not enough in areas like education and social services, which studies show deliver more bang for the buck than infrastructure spending.
“It is not enough just to hire workers to dig holes and then fill them in again,” said Toshihiro Ihori, an economics professor at the University of Tokyo. “One lesson from Japan is that public works get the best results when they create something useful for the future.”
Economists tend to divide into two camps on the question of Japan’s infrastructure spending: those, many of them Americans like Mr. Geithner, who think it did not go far enough; and those, many of them Japanese, who think it was a colossal waste.
Among ordinary Japanese, the spending is widely disparaged for having turned the nation into a public-works-based welfare state and making regional economies dependent on Tokyo for jobs. Much of the blame has fallen on the Liberal Democratic Party, which has long used government spending to grease rural vote-buying machines that help keep the party in power.
This seems reasonable. Hopefully the bipartisan group of Senators is reviewing the bill line-by-line to try to limit it to expenditures that both make sense from a cost-benefit point of view and that truly offer hope for stimulus. It needs to be done as quickly as possible but the Obama team at the White House should be doing this and should have been doing it for some time. They seem to have left the structure of the stimulus bill almost entirely to Congress, which is clearly a big mistake.