Avoiding a lost decade like Japan

We can see what to avoid as we try to stimulate our economy. Well, we want to, but Nancy Pelosi just wants to pay off her big Democratic supporters with pork and more pork. But in trying to stimulate it is too easy to get it wrong. Japan did in a big way. It was so bad that the 1990s is called Japan's "lost decade."

Gerald Seib - Avoiding Japan's Stimulus Miscues - WSJ.com:

Here's the critique in a nutshell: Japan in the early 1990s, like the U.S. today, saw a real-estate bubble burst, spawning a banking and credit crisis that drove the whole economy down, hard. The Japanese then tried stimulating the economy with giant doses of government spending, which didn't pep things up -- but did bring on deficits that required tax increases later, dragging out Japan's problems for years.

... Rep. Ryan argues that the Japanese, arriving at the crossroads the U.S. sees today, "went into heavy deficit spending on infrastructure and they continued to languish....They cranked up their debt through Keynesian spending, and it didn't work."

His fear is that the U.S., by spending heavily on stimulus now, will, like the Japanese, make economically chilling tax increases inevitable down the line to balance the books. "I worry we could be inviting a lost decade in America with wrong-headed fiscal policy," he says. A new study by Republicans on the House Budget Committee, where Rep. Ryan is the top GOP member, argues that Japan's policy mistakes led to "a protracted period of stagnation."

Japan's big spending "stimulus" was too slow to stimulate and having to pay for it lengthened the torpor. The slow speed war partly the kind of projects they tried. Big construction has a long lead time, so its fiscal stimulus comes 2 to 5 years later.

The parallel is not perfect. Japan raised taxes. That's not likely to happen. Although the Democrats always have a reason to raise taxes. And Japan had a tight money policy; we are doing the opposite.

And we have to make sure we avoid the "bow wave" effect that we see in Washington every biennium. The Legislature has some extra money, so they start a new program in the second of the two years and it doesn't cost that much for the first year. But it is permanent and inevitably grows. So the "cheap" new program soon becomes a drag. Japan was successful on this. We need to be careful.

So we have to stop the pork projects and get the speedy ones. Tax cuts are fast! Broad tax cuts will have a huge effect. Let's be careful and fast!